There is a very good article on Depreciation from Bruce Bartlett on the New York Times Economix blog this week. The article, entitled “Depreciation’s Place in Tax Policy”, gives a very enlightening history of depreciation and the reason behind many of the changes in the law over the years. He succinctly explains depreciation and accelerated depreciation:
Depreciation is an allowance for the decline in value of a long-lived capital asset. In theory, it should equal the cost of replacement when the asset ceases to have value. Accelerated deprecation represents that which is written off faster than the useful life of an asset.
He then delves into the origins of depreciation and how the 1800’s spawned the birth of the modern corporation, which in turn required a more sophisticated accounting system. The birth of the steam engine that began the growth of our railroad industry generated a large demand for capital. The concept of depreciation was developed to spread the cost to grow our railroad system over multiple years instead of expensing the cost at the time of the expenditure. This enabled the various railroad companies to show a profit and attract investors.
Over the last one and a half centuries, the income tax laws were enacted and depreciation has continued to play an important role in the growth of the US economy. There were significant changes during the 1980’s under President Reagan which were quickly removed a few years later when they were determined to be too generous. During the last decade, bonus depreciation and increased section 179 expense deduction limits have been used to stimulate our economy.
This short term stimulus is unsustainable, but Congress is struggling with how to increase revenue. If they roll back accelerated depreciation then the cost of capital will increase and potentially negatively impact corporate purchasing. So if bonus depreciation remains, then where will new revenue come from to cover a proposed reduction in corporate tax rate? We agree that they need to stop short-term depreciation stimulus and find a more consistent formula going forward.