The Effects of Temporary Partial Expensing on Investment Incentives in the United States

On March 9th, President Bush signed the Job Creation and Worker Assistance Act of 2002. The Act included a temporary increase in depreciation allowances for business spending on equipment and software (E&S) in the form of 30 percent partial expensing. In this paper we explore the impact of the Act on the marginal cost of equipment investment and find that it increases the incentive to invest in equipment significantly. We also investigate whether the temporary nature of the Act increases or decreases the stimulus associated with the tax reduction. We find that the Act provided more immediate stimulus than a permanent tax cut would have for base case parameters, but that this conclusion is not theoretically robust.