Malcolm Gladwell Annals of Commerce: The Terrazzo Jungle, 15 March 2004, The New Yorker, pages 120 to127, 2004, 1961, 1960, 1954, 1950s
" . . . Then in the mid-fifties, something happened that turned the dismal economics of the mall upside down: Congress made a radical change in the tax rules governing depreciation.
"Under tax law, if you build an office building, or buy a piece of machinery for your factory, or make any capital purchase for your business, that investment is assumed to deteriorate and lose some part of its value from wear and tear every year. As a result, a business is allowed to set aside some of its income, tax-free, to pay for the eventual cost of replacing capital investments. For tax purposes, in the early fifties the useful life of a building was held to be forty years, so a developer could deduct one-fortieth of the value of his building from his income each year. A new forty-million-dollar mall, then, had an annual depreciation deduction of a million dollars. What Congress did in 1954, in an attempt to stimulate investment in manufacturing was to "accelerate" the depreciation processes for new construction. Now, using this and other tax loopholes, a mall developer could recoup the cost of his investment in a fraction of the time. As the historian Thomas Hanchett argues . . . in The American Historical Review, the result was a "bonanza" for developers. In the first few years after a shopping center was built, the depreciation deductions were so large that the mall was almost certainly losing money, at least on paper - which brought with it enormous tax benefits. For instance, in a front-page article in 1961 on the effect of the depreciation changes, the Wall Street Journal described the finances of a real-estate investment company called Kratter Corp. Kratter's revenue from its real-estate investment operations in 1960 was $9,997,043. Deductions from operating expenses and mortgage interest came to $4,836,671, which left a healthy income of $5.16 million. Then came depreciation, which came to $6.9 million, so now Kratter's healthy profit had been magically turned into a "loss" of $1.76 million . . . The company's policy was to distribute nearly all of its pre-depreciation revenue to its investors . . .(which if it were income would be taxable.) . . . After depreciation, Kratter didn't make any money. That (distributed) money was "return on capital," and it was tax-free." p.125