Evening star. [volume] (Washington, D.C.) 1854-1972, 1958-01-20
Deprecated Depreciation

Should the drop in value Of the
dollar be considered in computing BUSH
ness plant and equipment depreciation
allowances for tax purposes? Business
has Just given an emphatic Affirmative
In testimony before the House Ways and
Means Committee. And 1t makes good
case
The law now permits depreciation
allowance based on the original cost Of
the item and spread over the years Of
its disable life. In theory this allowance.
is deducted from revenues before taxes.
and. by the end Of the disable life of the
item, represents a dollar reserve for
replacement of the item. Industry
argues. however. that by the end Of the
Is to 50 year period over which the item
is deprecated, the dollar by imitation
has dropped in value, resulting In a
replacement price higher than the value
OF the reserve. Certainly no one looking
at dollar purchasing power over the past
two decades could deny this.
The impact Of this situation is two
fold. First. industry is compelled to dip
into surplus or go into the money
market and borrow the difference be-
tween reserve and replacement cost
instead Of being able to use this surplus
or credit for expansion. In the case OF
small business and tight money mar
ket, 1t might become too costly to borrow
and thus operations continue with OBJ
solete equipment and deferred expan-
sion. Secondly. as dollar imitation re-
suits in insufficient annual allowance
for replacement, profits become over
stated on the books. The tax on those
profits becomes partially a levy against
capital instead Of against income.
The United States Chamber of Com
merce has pointed out to the House
committee that other big industrial
nations have in recent years set I'D
realistic depreciation policies which en-
courage replacement and expansion"
Canada, Germany, Sweden and Great
Britain permit writeoffs Of less than 10
years, and in some instances from one
to five years, the Chamber says. An
interesting REIMBURSEMENT allowance
formula has been proposed to the COM
mittee by the steel and several other
industries. This would allow the tax
payer to apply Government cost index
to his original cost.
II would work something like this:
A taxpayer in 1858 wants to replace a
deprecated item bought in 1898 for
100000 Suppose the cost index has in
creased 100 per cent. Thus, the item to-
day would be expected to cost 5000. 900.
In replacing the item the taxpayer could
deduct from his 1858 income any amount
spent over the original cost (SlOO.OO0)
up to the amount of the 100000 differ
ence as reinvestment allowance. The
new item would be deprecated as usual.
Any cost index decline would be expected
to reduce or do away with the reinvest-
ment allowance.
While it is true that this deprecia- :
ton squeeze is particularly acute In
terms Of items bought rs to 80 years
ago and now being replaced, and while
the effect OF such plan would seem a
tax reduction at a time when lowered
taxes may not be In the national inter-
est some consideration along these lines
seems vital to the survival Of some small
businesses and to the expansion capa-
bilities Of both small and big business.
And there are those who feel that ex-
panded productivity would more than
make up for the tax revenues Uncle
Sam might lose by recognition of this
problem.