Investment Incentives and the Discounting of Depreciation Allowances

Lawrence H. Summers

NBER Working Paper No. 1941 (Also Reprint No. r0984)
Issued in February 1988
NBER Program(s):   PE

This paper examines the discounting of depreciation allowances both

theoretically and empirically. Economic theory suggests that depreciation tax

shields should be discounted at the after tax riskless rates. However, a

survey of 200 major corporations indicates that they employ much higher

discount rates to depreciation allowances. Typical discount rates are in the

15 percent range. This finding suggests that "frontloaded" incentives like

the ITC provide maximal stimulus to corporate investment.

(125 K)

(89 K)

Published:

• Summers, Lawrence H. "Investment Incentives and the Discounting of Depreciation Allowances," The Effects of Taxation on Capital Accumulation, ed. by Martin Feldstein, Chicago: UCP, 1987. ,
• Investment Incentives and the Discounting of Depreciation Allowances, Lawrence H. Summers, in The Effects of Taxation on Capital Accumulation (1987), University of Chicago Press
  

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