There are two major arguments for accelerated depreciation under the tax laws: (1) It reduces tax liabilities and thus increases the sources of firms that purchase new assets. (2) It stimulates the incentive to purchase new assets. These effects are distinct. Because it increases investors' sources, accelerated depreciation is similar to a lower tax rate itself. The difference between accelerated depreciation and general tax relief is that accelerated depreciation increases the holdings only of firms that actually purchase new assets, whereas general tax relief also benefits firms that do not necessarily acquire new assets.' The investment incentive argument, however, maintains that accelerated depreciation stimulates the desire to purchase new physical assets.2 Even if the resources of investors remain unchanged despite business taxes (say by some combination of transfer payments and offsetting reductions of other taxes), private investors would invest more under a system of accelerated depreciation than they would under conventional depreciation. The investment incentive argument is implicit in the view of those who hold that businessmen will not risk acquiring new assets and equipment because of Treasury-imposed depreciation practices. It is this incentive argument we wish to examine. Unfortunately, traditional capital and investment theory gives little attention to business depreciation practices. There have been, however, good reasons for this omission. Any physical asset may be viewed as a stream of future dollars, which would include the asset's scrap value. From an investor's viewpoint, the decision whether to purchase a depreciable asset-which would contribute to investment spending-is simply a process of evaluating the asset's future cash payout as he would evaluate any other terminable annuity. Through a time discounting or capitalization process, an investor may derive a demand which provides him some positive rate of return. Or given the asset's supply price or construction cost, in addition to some idea