Economic Depreciation Rate Research Articles

Changes in Tax Neutrality of Effective Tax Rates in the Czech Republic in 2010–2018

he presented paper builds on previous research in this area (Holečková, 2013) and aims to examine the tax neutrality in the Czech Republic (i.e., the extent to which the given tax leaves corporate decisions as to investments or sources of financing unchanged). A tax system that seeks to raise revenue without distortive effects is considered a neutral tax system. This aspect is of great importance as it defines one of the aims of modern tax systems and points towards one specific criterion by which they may be assessed. Our approach adopts effective tax rates on different types of capital assets and sources of financing and based on the calculation of the tax wedges it assesses the degree to which taxation affects the incentive to undertake investments in the Czech Republic. The precise methodology used to calculate effective tax rates on marginal investments is based on the approach developed by King and Fullerton (1984), whose methodology became the most widely accepted method adopted to calculate effective tax rates (tax wedges). The method appeals to both academics and practitioners to this day (e.g., Florio, 2007). The tax wedge will vary according to the type of asset: machinery, buildings, inventory (because of different capital allowance rates relative to the assumed true economic depreciation rates) and the type of financing sources: new equity, debt and retained earnings (since the tax treatment of debt, dividends and retained earnings differs). Effective tax rates take into account not only the statutory corporate tax rate, but also other aspects of the tax system which determine the amount of taxes paid and profitability of investment, including personal taxes. The paper finds out that, based on the calculations for 2018, businesses need to ensure the rate of return higher by 1.33 percentage points for the retained earnings (and by 1.80 percentage points for new equity, respectively) compared to the final post-tax rate of return which investors actually get. The adopted analysis suggests that Czech tax system tends to favour investments in machinery on the expense of buildings and, particularly, inventories. With this respect, our results correspond to outcomes of other, similar country-specific studies, such as, for example, de Almeida–Paes (2013). The tax system also lacks neutrality when considering alternative sources of finance, i.e., the debt finance tends to be favoured over equity and retained earnings.

The Decline in Capital Efficiency and Labour Share

We calibrate and simulate a neoclassical growth model with a variable elasticity of substitution production function and three types of technological change: labour‐augmenting, capital‐augmenting and investment‐specific. In this framework, we find that the decline in US labour share was caused by a large decline in capital efficiency, which led to a decrease in the ratio of effective capital to effective labour in a context in which capital and labour are gross complements. Moreover, the decline in the relative price of investment contributed to reducing the fall in US labour share, while the increase in the economic depreciation rate of US fixed assets accounted for a small reduction in US labour share.

Economic and statistical measurement of physical capital: From theory to practice

The standard measurements of capital and depreciation are statistical measures based on assumptions about the average service life of capital goods, which are accumulated according to the perpetual inventory method. The purpose of this paper is to obtain a true economic measure of capital stock according to the prescriptions of the neoclassical theory. In this way, we develop an alternative method based on the equations that solve the dynamic optimization problem of the firm, yielding an economic estimation based on indicators of profitability, such as the distributed profits and the Tobin's q ratio. Thus, this method enables us to endogenously calculate the variables' rate of depreciation and capital stock. We apply this procedure to the Spanish economy, getting the series of an economic measure of depreciation and the economic value of capital stock. Our results show an economic depreciation rate that fluctuates around the statistical rate. Moreover, we get two time profiles for the economic and statistical capital stocks that differ significantly from each other.

Estimating Tobin’s Q for Listed Firms in Korea (1980-2005): Comparing Alternative Approaches and an Experiment with Investment Functions

Tobin's Q is the most common measurement of firm value and performance. However, estimating Tobin's Q accurately is not easy. Researchers have used book values of debts or assets rather than the market values. We estimate Tobin's Q for listed firms in Korea from 1980 to 2005 based on replacement costs of assets as well as market values of debts and common and preferred stocks. We compare the estimates using the modified annual average depreciation rates and economic depreciation rates. In sum, we present and compare four alternative series of Tobin's Q measures. We then estimate investment functions with alternative Tobin's Q values as regressors to compare the reliability of alternative estimates. We find that the simple measure of using book values of both debts and assets is the most unreliable.Keywords: Tobin's Q, Firm value, Replacement costs, Investment function, Korean firms, Business groupsJEL Classification: E22, L25, G34(ProQuest: ... denotes formulae omitted.)I. IntroductionFirm value (hereafter FV) calibrates the efficiency of signaling a firm's performance in the market, forecasts expected yields of investments, and assesses the realized efficiency of investments. Accordingly, scholars have improved the methodological precision in their estimates of FV. Currently, Tobin's Q ratio (aka Tobin's Q) (1969) is the most widely adopted measurement. This ratio constructs FV by using the ratio of market values of liabilities and stock to replacement costs of assets. The market value of a firm's assets is obtained from the sum of the market values of stock and liabilities. Replacement costs represent the amount it would cost to replace an asset at its current price.However, calculating Tobin's Q accurately is not easy. The market values of stock and liabilities are difficult to estimate. Estimating replacement costs also requires consideration of various factors related to different types of assets, which complicates the computation. Therefore, many researchers tend to use book values rather than market values of liabilities and assets.In several empirical studies, Tobin's Q has been adopted as a key independent or dependent variable (Morck et al. 1988; Lang and Stultz 1994; Baek et al. 2004; Kang et al. 2006; Kim 2009). However, because of the difficulty in computation, the ratio is frequently replaced by the market-to-book (M/B) ratio. This ratio is a simple method that divides the sum of market capitalization at year-end and the book value of liabilities by the book value of assets (Black et al. 2003; Drobetz et al. 2004; Yoon et al. 2005; Bae et al. 2008). Alternatively, Tobin's Q has been partially estimated, for example, by using either the market value of liabilities or the replacement costs of assets (Kang et al. 2004). However, even the partial estimation of Tobin's Q tends to be done only for specific periods. Despite its theoretical and empirical importance, very little attempt is done to estimate Tobin's Q over a long-term period, particularly in Korea. Given the limitations of this stream of research, this study aims to estimate an accurate Tobin's Q of Korean listed firms in the longest period possible.Our estimation method follows Lindenberg and Ross (1981) and Hoshi and Kashyap (1990), who further developed the methodology of Tobin (1969). We compare existing methods and the differences in estimation results. We also make several important improvements, such as in the estimation of values of preferred stocks and replacement costs of assets. We estimate the values of preferred stocks following Lindenberg and Ross (1981) and Summers (1981), and divide average dividends by average dividend ratio. This method is better than others because prices of preferred stocks are not easily available due to less frequent transactions.Improvement in the estimation of the replacement costs of assets hinges on the method of calculating depreciation rates. Hong et al. …

Technological progress, obsolescence, and depreciation

We construct a two-sector vintage capital model with neutral and investment-specific technical progress and variable utilization of each vintage. The lifetime of capital goods is endogenous and it relies on the associated maintenance costs. First, we show that the lifetime of capital is an increasing (resp. decreasing) function of the rate of neutral (resp. investment-specific) technical progress. Second, we show that both the use-related depreciation rate and the scrapping rate increase when investment-specific technical progress accelerates. However, the latter drops when neutral technical progress accelerates, while the former remains unaffected. It is also shown that (i) the economic depreciation rate depends on the decline rate of the quality-unadjusted relative price of investment and (ii) the age-related depreciation rate depends on the obsolescence rate.

Fixed capital stock depreciation in developing countries: Some evidence from firm level data

Previous growth accounting studies suggest severe capital underutilisation and mismeasurement of the stocks of capital in some developing countries. Using the firm level data sets from the World Bank surveys, this paper estimates the economic depreciation rates of fixed capital stocks in the manufacturing industries of seven developing countries. The findings indicate that the stocks of fixed capital may depreciate at higher rates in these countries, as compared with the normal rates usually assumed for advanced industrial countries. This study also discusses the economic and social forces that may influence the incentive to maintain capital appropriately and the implications of high depreciation for the total factor productivity (TFP) growth estimates and volatility of capital accumulation.

Rymes' measure of productivity growth: The static and the dynamic view

where Y is output, H is the labour input, S is a measure of capital services, 1 P is the price of output (assumed to be the same as capital goods in the one commodity model), π is the wage rate and r is the gross rental price of capital services. The latter is made of the price of capital goods times the gross rate of return ρ. In turn, the gross rate of return is defined from the nominal net rate of return ι, the economic depreciation rate δ and the capital gain component as:

Quantifying embodied technological change

We estimate the rate of embodied technological change directly from plant-level manufacturing data on current output and input choices along with histories on their vintages of equipment investment. Our estimates range between 8 and 17 percent for the typical US manufacturing plant during the years 1972–1996. Any number in this range is substantially larger than is conventionally accepted with some important implications. First, the role of investment-specific technological change as an engine of growth is even larger than previously estimated. Second, existing producer durable price indices do not adequately account for quality change. As a result, measured capital stock growth is biased. Third, if accurate, the Hulten and Wykoff (1981, Depreciation Inflation, and the Taxation of Income From Capital; Urban, Washington, DC, pp. 81–125) economic depreciation rates may primarily reflect obsolescence.

The Production-Side Approach to Estimating Embodied Technological Change

We estimate the rate of embodied technological change directly from plant-level manufacturing data on current output and input choices along with histories on their vintages of equipment investment. Our estimates range between 8 and 17 percent for the typical U.S. manufacturing plant during the years 1972-1996. Any number in this range is substantially larger than is conventionally accepted with some important implications. First, the role of investment- specific technological change as an engine of growth is even larger than previously estimated. Second, existing producer durable price indices do not adequately account for quality change. As a result, measured capital stock growth is biased. Third, if accurate, the Hulten and Wykoff (1981) economic depreciation rates may primarily reflect obsolescence.

The Production-Side Approach to Estimating Embodied Technological Change

We estimate the rate of embodied technological change directly from plant-level manufacturing data on current output and input choices along with histories on their vintages of equipment investment. Our estimates range between 8 and 17 percent for the typical U.S. manufacturing plant during the years 1972-1996. Any number in this range is substantially larger than is conventionally accepted with some important implications. First, the role of investment-specific technological change as an engine of growth is even larger than previously estimated. Second, existing producer durable price indices do not adequately account for quality change. As a result, measured capital stock growth is biased. Third, if accurate, the Hulten and Wykoff (1981) economic depreciation rates may primarily reflect obsolescence.

Optimal Dynamic Investment Policy for Different Tax Depreciation Rates and Economic Depreciation Rates

This paper analyzes the investment policy consequences of incorporating a tax depreciation rate different from the economic depreciation rate. Most often, firms choose their tax depreciation rate in a strategic way. Therefore, it would be a coincidence, should the optimization process lead to a tax depreciation rate that equals the economic depreciation rate. The implications of a difference between tax depreciation rate and economic depreciation rate are investigated in an optimal control model for the determination of the firm investment policy over time.

Optimal Dynamic Investment Policy Under Different Rates for Tax Depreciation and Economic Depreciation

This paper analyzes the consequences of incorporating a different rate for tax depreciation than for economic depreciation. Firms most often choose their tax depreciation rate in a strategic way. It would therefore be a coincidence if this optimization process leads to a tax depreciation rate that equals the economic depreciation rate. The implications of a difference between tax depreciation and economic depreciation are investigated in an optimal control model for the determination of the firm's optimal investment policy over time.

Measuring depreciation in single-family rental and owner-occupied housing

A wide variety of research has been developed around the estimation of economic depreciation rates on single-family houses. One aspect that has not been fully investigated in the literature has been the effects of tenure status on depreciation in housing. Tenants face different incentives than owner-occupants with respect to care for property, and we know little about landlord response to this difference and landlord behavior in general. This paper examines the extent to which the type of occupancy—tenant versus owner-occupant—influences the net (of maintenance) depreciation of single-family houses. The paper finds that tenant-occupied single-family dwellings depreciate faster than owner-occupied units, holding all else constant.

A Statistical Test of the Stability Assumption Inherent in Empirical Estimates of Economic Depreciation

Realistic estimates of economic depreciation are required for analyses of tax policy, economic growth and production, and national income and wealth. THe purpose of this paper is to examine the stability assumption underlying the econometric derivation of empirical estimates of economic depreciation for industrial machinery and and equipment. The results suggest that a reasonable stability of economic depreciation rates of decline may exist over time. Thus, the assumption of a constant rate of economic depreciation may be a reasonable approximation for further empirical economic analyses.