A Retrospective Evaluation of the Effects of Temporary Partial Expensing - 2006-19 - Staff working paper

Sep 19, 2026

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This paper examines how business investment responded to temporary partial expensing, first enacted in 2002 and expanded in 2003. In principle, partial expensing increased the incentive to invest, but the tax changes occurred alongside other economic forces, making isolation difficult. The empirical strategy exploits a feature that, under specific assumptions, enables clean impact estimation using a difference-in-difference framework. Evidence from monthly and quarterly expenditure patterns shows ambiguity, with only limited support from anecdotal accounts.

LanguageEnglish

CategoryPaper Templates

FormatPDF

Pages26

Reading Time9 min

AccessFree to download

I. Introduction

Tax incentives and the natural experiment

Expected patterns before and after expiration

Organization of the paper

II. Present value of depreciation allowances

III. Theoretical impact on investment expenditures

IV. Empirical results

V. Other evidence

Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. A Retrospective Evaluation of the Effects of Temporary Partial Expensing Darrel Cohen and Jason Cummins 2006-19 NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers. A Retrospective Evaluation of the Effects of Temporary Partial Expensing April 2006 Darrel Cohen Senior Economist Division of Research and Statistics Federal Reserve Board Washington, D. C. 20551 [dcohen@frb.gov](dcohen@frb.gov) Jason Cummins Chief U. S. Economist Brevan Howard, Inc. 1776 Eye St, NW Suite 250 Washington, D.C. 20006 [jason.cummins@brevanhoward.com](jason.cummins@brevanhoward.com) 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. We thank Andy Abel, Eric Engen, Mike Feroli, Glenn Follette, Pierre Lafourcade, Jeremy Rudd, Dan Sichel, and Larry Slifman for helpful discussions and Shagufta Ahmed and Julie Stephens for excellent research assistance. Special thanks go to Matt Knittel for providing us with summary statistics about partial expensing from 2002 and 2003 corporate tax returns. The views expressed are those of the authors and do not necessarily represent those of the Board of Governors or the staff of the Federal Reserve System. I. Introduction This paper studies the impact of tax incentives on business investment using a unique natural experiment provided by counter-cyclical fiscal policy in the U.S. To help stimulate short-run economic activity, a tax bill was enacted in March 2002 and subsequently expanded in May 2003 that included a temporarily enhanced incentive to invest in business equipment and software. This incentive, a form of accelerated depreciation described below, is commonly referred to as temporary partial expensing or bonus depreciation. As we quantify below, temporary partial expensing is more advantageous for long-lived than short-lived capital goods. Intuitively, a short-lived asset should not benefit much from the partial expensing provision because it already gets most of its depreciation allowances relatively quickly. As a result, partial expensing not only should have increased the growth of expenditures on eligible capital goods but increased it more for relatively long-lived assets before the law expired. Similarly, shortly after expiration, growth should have declined,

FAQs

What is temporary partial expensing (bonus depreciation) in this paper?

It is an accelerated depreciation tax incentive temporarily enhanced in 2002 and expanded in 2003 for business equipment and software.

Why is it difficult to isolate the tax incentive’s impact?

The tax changes did not occur in a vacuum, so other factors may also affect investment spending. The paper addresses this through a targeted empirical design.

How does the paper estimate the effect empirically?

It constructs a difference-in-difference estimator based on a feature of the tax change that allows clean estimation under certain assumptions.

Sep 19, 2026

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