A retrospective evaluation of the effects of temporary partial expensing
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.
|Date of creation:||2006|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Auerbach, Alan J. & Hassett, Kevin, 1992.
"Tax policy and business fixed investment in the United States,"
Journal of Public Economics,
Elsevier, vol. 47(2), pages 141-170, March.
- Alan J. Auerbach & Kevin Hassett, 1991. "Tax Policy and Business Fixed Investment in the United States," NBER Working Papers 3619, National Bureau of Economic Research, Inc.
- Rochelle M. Edge & Jeremy B. Rudd, 2005. "Temporary partial expensing in a general-equilibrium model," Finance and Economics Discussion Series 2005-19, Board of Governors of the Federal Reserve System (U.S.).
- Auerbach, Alan J, 1989.
"Tax Reform and Adjustment Costs: The Impact on Investment and Market Value,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 939-962, November.
- Alan J. Auerbach, 1986. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," NBER Working Papers 2103, National Bureau of Economic Research, Inc.
- Lawrence H. Summers, 1987.
"Investment Incentives and the Discounting of Depreciation Allowances,"
NBER Chapters,in: The Effects of Taxation on Capital Accumulation, pages 295-304
National Bureau of Economic Research, Inc.
- Lawrence H. Summers, 1986. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Working Papers 1941, National Bureau of Economic Research, Inc.
- Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004.
"How Much Should We Trust Differences-In-Differences Estimates?,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 119(1), pages 249-275.
- Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
- Abel, Andrew B., 1982. "Dynamic effects of permanent and temporary tax policies in a q model of investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 353-373.
- Christopher L. House & Matthew D. Shapiro, 2008.
"Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation,"
American Economic Review,
American Economic Association, vol. 98(3), pages 737-768, June.
- Christopher House & Matthew D. Shapiro, 2006. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," NBER Working Papers 12514, National Bureau of Economic Research, Inc.