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The Pedagogy of Taxes and Tax-Purpose Depreciation Introduction

Most economic analysis in industry is done without considering the effects of taxes. In some cases, typically those involving substantial investments, income tax can make an important difference in the final decision. For this reason most introductory courses in engineering economy include a section on taxes and, necessarily, on tax-purpose depreciation.

In any introductory course there are always some simplifications to be made. We would not, for example, begin a course in circuit analysis with a statement that Ohm's law is an approximation and that we need to understand the exact relationship between voltage and current for each different material. In the introductory engineering economy course these simplifications are mostly of little consequence. Monthly payments on a loan are, after all, about as simple in reality as we present them to be. Taxation, however, is a different matter altogether.

"Tax simplification" is an oxymoron. Tax professionals spend many hours each year just to keep up with the changes in tax laws and their interpretation. In one or two class periods we cannot give our students even a modicum of expertise on the subject. Even an entire semester course can barely scratch the surface of this complex subject. So, oxymoron or not, we must simplify taxes. The goal should be to provide as much useful knowledge as possible without confusing or misinforming. This problem is constrained by the limited time available and the limited background of our students. It is properly the place of the professor to decide which information is useful. This paper will make some suggestions in that regard but there is probably little disagreement on most of the topics to be covered. Most professors would probably agree that many students are confused by these topics. This paper will attempt to show where that confusion arises in the hope that improved presentation can eliminate at least some of it. Misinformation is obviously inadvertent and this paper will point out some of the more important issues which may be incorrectly presented in the introductory course.

The methodology, however, is indirect. Five textbooks were chosen as a representative cross section of those texts currently used in introductory courses. In lieu of a survey or collection of course notes from a number of courses, it will be assumed that the books are representative as well of the way these topics are currently being taught. There is a great variety in approaches and terminology in the books which would seem to indicate a similar variety in approaches and terminology in the courses.

Three of the books are among the most widely used and have been through numerous editions. Two of those are the "essentials" or "fundamentals" versions of those books since these are more widely used in the shorter, one-term courses that are most commonly required across a number of disciplines at many universities. One is less widely used but from a prolific textbook author and the fifth is a completely new book in its first edition.

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Lundquist, R. (2009, June), The Pedagogy Of Taxes And Tax Purpose Depreciation Paper presented at 2009 Annual Conference & Exposition, Austin, Texas. 10.18260/1-2--5124