Conditions for Investor and Customer Indifference to Transitions among Regulatory Treatments of Deferred Income Taxes

Despite a long debate over the methods regulators can use to treat deferred income taxes from accelerated depreciation, there appears to be no formal analysis of the conditions under which customers and investors will prefer each method and under which a transition among the methods will leave investors or customers indifferent to the change. This article demonstrates that regulatory selection of a deferred tax treatment method necessarily changes the wealth of investors or customers if their discount rates differ. Moreover, transitions among the various methods create further wealth changes for assets in existence at the time of the switch, at least for some groups. These changes can reverse the usual preferences among the methods.