Depreciation, inflation and investment incentives: the effects of the tax acts of 1981 and 1982 [Economic Recovery Tax Act and Tax Equity and Fiscal Responsibility Act]

• Published in: Review - Federal Reserve Bank of St. Louis 1984-11, Vol.66 (9), p.17-30
• Main Author: Ott, Mack
• Format: Article
• Language: English
• Subjects: Accelerated; Accounting; Capital investments; Capital, Fixed; Corporate income tax; Cost recovery; Deductions; Depreciation; Depreciation methods; Economic policy; Effects; ERTA 1981-US; Impacts; Industrial expansion; Inflation; Legislation; Savings Investments; Tax aspects; Tax deductions; Tax incentives; Tax legislation; Tax reform; Taxation; Taxes; TEFRA 1982-US; United States
• ISSN: 0014-9187; 2163-4505

The effects of the Economic Recovery Tax Act of 1981 (ERTA) and the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) are assessed in light of: 1. the economics of depreciation deductions, 2. depreciation accounting, and 3. the relation of US capital investment to distortions in depreciation and inflation during the last 30 years. The tax reduction provided by ERTA essentially shortened tax lifetimes over which assets are depreciated. The changes in TEFRA repealed the more accelerated depreciation schedules that would have followed in 1985 and 1986. TEFRA left intact the basic shortening of the asset tax lives implemented in ERTA, thus lowering the portion of net proceeds on which corporations would pay taxes and raising the value of capital. The impacts of ERTA and TEFRA have been augmented by the substantial decline in inflation rates since 1980 and, more importantly, by the change in investors' expectations about what inflation rate policymakers will bring about in the future.