In part because of concerns that the tax depreciation system may be dated and may not properly measure income, Congress directed that the Treasury study the current tax depreciation system. This paper is derived from the staff work for the Treasury Study. The paper first discusses the rationale for a depreciation allowance. It next describes the current tax depreciation system. Using the cost of capital, the paper evaluates the current tax depreciation system. It then discusses several comprehensive reforms of the tax depreciation system, and calculates the effects of these reforms on the cost of capital. The final section discusses several practical problems with the current tax depreciation system.