Keywords: Partial expensing, bonus depreciation, difference-in-difference estimation
Abstract: This paper examines how business investment responded to temporary partial expensing,
first enacted in 2002 and expanded in 2003. In principle, partial expensing boosted
the incentive to invest which should have had a discernable impact on spending.
However, the tax changes did not occur in a vacuum, so it is challenging to isolate
their impact. Our empirical approach exploits a feature of the tax change which,
under certain assumptions, allows us to cleanly estimate its impact. Specifically,
partial expensing provided relatively generous tax treatment for long-lived assets.
We use this insight in order to construct a difference-in-difference estimator of the
tax effects. In addition, the standard model of investment with capital adjustment
costs predicts a run up in investment spending prior to expiration and a pothole just
after. Our examination of the details of expenditure patterns before, during, and
after partial expensing using both monthly and quarterly data suggests considerable
ambiguity as to whether the model's predictions were borne out. In addition, anecdotal
evidence provides only limited support for the effectiveness of temporary partial expensing.
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Last update: May 4, 2006