The Willamette River Case: Costs 221 



For example: Assume that 70 per cent of the $23.4 million 

 investment in our hypothetical Willamette River hydroelectric 

 facilities was adjudged to be defense-supporting under private 

 development. If so, $16.4 million would be eligible for complete 

 depreciation, for purposes of tax conputation, during the first five 

 years. Depreciation charges are deductible from income, for tax 

 purposes; hence, there would be a tax saving to the private utility. 

 Since we have assumed a marginal corporate tax rate of 50 per cent, 

 this saving during the first five years of operation would amount 

 to one-half the difference between depreciation charges computed 

 under rapid amortization schedules and the charges which would 

 be appropriate under normal depreciation. In our particular 

 example, the $16.4 million, if depreciated by means of straight-line 

 depreciation schedules ^3 over a fifty-year period, would require 

 depreciation charges of $327,712 per year. If rapid amortization 

 schedules are assumed, reduction of the write-off period to a tenth 

 (from fifty to five years) would increase annual depreciation 

 charges tenfold— from $327,712 to $3,277,120, or a difference of 

 $2,949,408. Half of this, $1,474,704, would represent the amount of 

 tax liability that would be avoided by the private utility each year 

 during the first five years. 



During the following forty-five years, having that part of its 

 investment eligible for rapid amortization completely depreciated, 

 the utility's annual depreciation charges would run $327,712 less 

 than in the absence of accelerated amortization. Its annual income 

 would be correspondingly overstated. This would result in an 

 annual increased tax liability of $163,856 over the next forty-five 

 years of its operation under the federal license. 



Under rapid amortization, the tax savings during the first five 

 years would be compensated for by increased tax burdens on the 

 utility during its next forty-five years of operation, provided only 

 that the marginal corporate tax rate remained constant.^* Over the 

 first five years, tax liabilities amounting to $1,474,704 per year 

 would be shifted from the utility to the general public; during 

 the remainder of the license period, the shift, in the amount of 



^ Ibid., "Notes to Financial Statements," Note 3, p. 21. 



^ For a treatment of a related case in which the effects of changing marginal 

 tax rates are taken into account, see John V. Krutilla, "Locational Factors 

 Influencing Recent Aluminum Expansion," The Southern Economic Journal, 

 January 1955, Appendix iv. 



