A Retrospective Evaluation of the Effects of Temporary Partial Expensing

26 Pages Posted: 21 Jun 2006

See all articles by Darrel S. Cohen

Darrel S. Cohen

Federal Reserve Board - Division of Research and Statistics

Jason G. Cummins

Brevan Howard Asset Management LLP

Date Written: April 2006

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.

Keywords: Partial expensing, bonus depreciation, difference-in-difference estimation

JEL Classification: H25, E22

Suggested Citation

Cohen, Darrel S. and Cummins, Jason Gustav, A Retrospective Evaluation of the Effects of Temporary Partial Expensing (April 2006). FEDS Working Paper No. 2006-19. Available at SSRN: https://ssrn.com/abstract=910904 or http://dx.doi.org/10.2139/ssrn.910904

Darrel S. Cohen (Contact Author)

Federal Reserve Board - Division of Research and Statistics

Washington, DC 20551
United States
202-452-2376 (Phone)
202-452-3819 (Fax)

Jason Gustav Cummins

Brevan Howard Asset Management LLP ( email )

London, SW1Y 6XA
United Kingdom

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