Boston University School of Law

 

Invariant Valuation and Economic Depreciation:
A Constructive Proof of the Samuelson Theorem

Theodore S. Sims


Boston University School of Law Working Paper 11-06 (February 14, 2011)

Abstract

I elaborate on Samuleson’s (1964) result that a tax on capital income will leave asset values unaffected by the tax rates of their holders only if "economic" depreciation is allowed as a deduction in computing taxable income, extended by Lyon (1990) to the case of time-varying marginal rates. Neither offers any insight into why, with economic depreciation, economic agents in a taxable environment should behave as though (as Lyon puts it) they were discounting all pretax "cash receipts . . . at the pre-tax interest rate." Using discrete time, I formulate a constructive proof of Samuelson’s result, which shows that economic depreciation induces pure accrual taxation, with the result that the impact of income taxation on the accrual of value and on discounting exactly offset one another. That is why taxpayers behave as though they were discounting pre-tax cash flows.

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Suggested Citation:

Theodore S. Sims, "Invariant Valuation and Economic Depreciation: A Constructive Proof of the Samuelson Theorem,:" B.U. Law Working Paper No. 11-06 (February 14, 2011).

Contact Information

Theodore S. Sims

Boston University School of Law
765 Commonwealth Avenue
Boston, MA 02215

sims@bu.edu

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