Some Analytical Results on Tax Depreciation

Issue: Spring 1970

Pages: pp. 82-112

Authors: Peter B. Linhart

Title: Some Analytical Results on Tax Depreciation

Abstract: A mathematical framework for the discussion of accelerated tax depreciation methods for regulated utilities is constructed. Using this framework a number of results are derived, some of them novel. We show, for example, under what circumstances interested parties such as the customers and the tax collector should rationally prefer flowthrough or normalization. The most important conclusion is that, following a switch from straight-line book and tax depreciation to accelerated tax depreciation with flowthrough, very substantial rate increases will always be required after a fixed interval, regardless of the firm's growth rate. Effects of accelerated tax depreciation on interest coverage and tax-free dividends are also discussed, and some numerical results are given. The model is general enough to allow incorporation of a number of realistic conditions, as, for example, debt in the capital structure and a dispersed life table.

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