A Lesson of Hanukkah: It’s Difficult to Determine Asset Lives

December 7, 2015

This week, Jews around the world celebrate the eight-day holiday of Hanukkah. The holiday offers a different message for everyone: for some, it’s about light overcoming darkness and fighting for justice; for others, it’s about the triumph over assimilation or religious liberty. But Hanukkah offers a special message to members of the tax policy community: the inherent difficulty of determining asset lives.

If you haven’t heard of the miracle of Hanukkah, here goes: when Antiochus Epiphanes became the king of the Seleucid Empire, he forbade the Judeans in his realm from studying the Torah, observing the Sabbath, and circumcising their sons. A group of Jews, known as Maccabees, revolted against him, defeated his troops, and retook the Holy Temple in Jerusalem. However, when they entered the Temple, they found that almost all of the oil for lighting the lamp had been defiled; only one jar of oil was left. The Maccabees despaired, because they thought the jar contained only enough oil to last for a single day. But a miracle occurred, and the oil lasted for eight days, instead of one.

To spell out the lesson of the story more slowly – the Maccabees came into possession of an asset (a jar of oil). They thought it would lose its value over a certain time period (a single day). However, the asset actually took much longer to depreciate (eight days).

In other words, it is very difficult to anticipate how quickly an asset will lose its value – not just for the Maccabees, but for businesses and policymakers today.

The federal tax code operates on the pretense that the life of an asset can be determined as soon as it is purchased. When businesses make investments, they are required to categorize their new assets into one of over two dozen depreciation schedules, which are designed to approximate the pace at which new assets will lose their value over time. These schedules then determine how quickly businesses are able to deduct their investment costs.

The problem with these schedules is that they’re completely arbitrary: because it’s impossible to know how quickly assets will lose their value, the current system of tax depreciation is an exercise in imagination and hand-waving. For instance, businesses are required to spread out the deduction for new office machinery over five years, even though some printers become obsolete more quickly and some copy machines stick around for much longer. It doesn’t help that companies often lobby for their assets to be placed into shorter schedules (which are more favorable), creating a patchwork system of incentives for favored companies.

The tax treatment of investments would be much simpler and more equitable if businesses were simply allowed to immediately deduct the full value of all of their investments. Whether a business’s jar of oil lasts one day or eight days, it would see the same tax deduction – the full cost of the jar.

Hanukkah means something different to everyone, but one message of the holiday stands out: you never really know how long it will take for assets to depreciate.


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