The quantitative effect of basing company taxation on replacement costs *

The differences between company profits reckoned as revenues less historical costs, and company profits reckoned as revenues less replacement costs, have been considerable in many of the post-war years, mainly because of the neglect of stock appreciation and the inadequate allowance by historical cost depreciation allowances for durable capital consumption in the former reckoning. ¹ In consequence, many writers have been led to call for reforms both in accounting procedures and in the methods of estimating company profits for taxation purposes. ² Generally, the accounting profession has not been in favour of any of the suggested schemes that attempt to replace historical cost accounting by replacement cost accounting (for example, the use of L.I.F.O. methods for stock valuation and the adjustment of historical cost depreciation allowances by indices of the prices of fixed assets), nor did the Millard Tucker Committee or the Royal Commission on the Taxation of Profits and Income suggest reforms incorporating such principles. The granting of initial allowances (and, later, investment allowances) for expenditure on plant and machinery did, in effect, compensate for (sometimes more than compensate for) the inadequate allowance by historical cost depreciation allowances for durable capital consumption; ³ but this result was a by-product of their main purpose, which was to encourage investment expenditure, and, moreover, the result depended upon companies spending the same or an increasing amount on durable assets in future years. ⁴