Menu
Tax Notes logo

CRS Says Tax Reform Priority Makes Depreciation, Expensing Outlook Uncertain

JUL. 15, 2013

RL31852

DATED JUL. 15, 2013
DOCUMENT ATTRIBUTES
Citations: RL31852

 

Gary Guenther

 

Analyst in Public Finance

 

 

July 15, 2013

 

 

Congressional Research Service

 

7-5700

 

www.crs.gov

 

RL31852

 

 

Summary

Expensing is the most accelerated form of depreciation for tax purposes. Section 179 of the Internal Revenue Code (IRC) allows a taxpayer to expense (or deduct as a current expense rather than a capital expense) up to $500,000 of the total cost of new and used qualified depreciable assets it buys and places in service in 2013, within certain limits. Firms unable to take advantage of this allowance may recover the cost of qualified assets over longer periods, using the appropriate depreciation schedules from Sections 167 and 168. While the Section 179 expensing allowance is not targeted at firms that are relatively small in employment, asset, or receipt size, the rules governing its use generally confine its benefits to such firms.

In addition, Section 168(k), which provides a so-called bonus depreciation allowance, generally allows taxpayers to expense half the cost of qualified assets bought and placed in service in 2013. Taxpayers that can claim the allowance have the option of monetizing any unused alternative minimum tax credits left over from tax years before 2006, within certain limits, and writing off the cost of the assets that qualify for the allowance over longer periods.

This report examines the current status, legislative history, and economic effects of the two expensing allowances. It also discusses initiatives in the 113th Congress to modify them. The report will be updated as legislative activity warrants.

Both expensing allowances have enjoyed broad bipartisan support in recent Congresses. The American Taxpayer Relief Act of 2012, P.L. 112-240, increased the maximum Section 179 expensing allowance to $500,000 and the phaseout threshold to $2 million for qualified assets acquired and placed in service in 2012 and 2013. The act also extended through 2013 the 50% bonus depreciation allowance from 2012. Several bills (e.g., S. 1085) to extend or enhance the two allowances have been introduced in the 113th Congress. But with tax reform a high priority for the chairmen of the House Ways and Means and Senate Finance Committees, the outlook in the current Congress for enacting changes in either or both allowances is uncertain.

Since 2002, the two allowances have served as one of several tax incentives for stimulating the U.S. economy. This raises the question of their effectiveness. Though there are no studies that address the economic effects of the enhanced Section 179 allowances enacted in the previous eight years, several studies have examined the economic effects of the 30% and 50% bonus depreciation allowances that were available from 2002 to 2004. The two allowances applied to mostly the same property. Basically, the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.

Available evidence, as incomplete as it is, indicates that the expensing allowances probably have had no more than a minor effect on the level, composition, and allocation among industries of business investment; the distribution of the federal tax burden among income groups; and the cost of tax compliance for smaller firms. On the one hand, an expensing allowance has the potential to spur increased small business investment in favored assets in the short run by reducing the user cost of capital and increasing the cash flow of investing firms. It also has the advantage of simplifying tax accounting for depreciation for firms that take the expensing allowance. On the other hand, an expensing allowance could interfere with the allocation of economic resources by diverting capital flows away from investments with more productive outcomes and speeding up the timing of qualified investments.

                               Contents

 

 

 Introduction

 

 

 Current Expensing Allowances

 

 

      Section 179

 

 

           Maximum Expensing Allowance

 

 

           Qualified Property

 

 

           Limitations on Use of the Section 179 Allowance

 

 

           Claiming the Allowance

 

 

 Bonus Depreciation Allowance

 

 

      Interaction with Other Depreciation Allowances, Including the

 

 

           Section 179 Allowance

 

 

 Legislative History of the Two Expensing Allowances

 

 

      Section 179

 

 

      Bonus Depreciation Allowance

 

 

 Legislative Initiatives in the 113th Congress to Modify the

 

 Two Expensing Allowances

 

 

      Section 179 Expensing Allowance

 

 

           House Bills

 

 

           Senate Bills

 

 

           President's Budget Request for FY2014

 

 

      Bonus Depreciation Allowance

 

 

           House Bills

 

 

           Senate Bills

 

 

           President's Budget Request for FY2014

 

 

 Economic Effects of the Section 179 and Bonus Depreciation Allowances

 

 

      The Allowances as Tools for Economic Stimulus

 

 

      Efficiency Effects

 

 

      Equity Effects

 

 

      Tax Administration

 

 

 Tables

 

 

 Table 1. Maximum Expensing Allowance and Investment Limitation from

 

          1987 to 2014

 

 

 Contacts

 

 

 Author Contact Information

 

 

Introduction

Under current tax law, firms may expense (or deduct as a current rather than a capital expense) up to $500,000 of the total cost of new and used qualified assets they purchase and place in service in 2013 under Section 179 of the federal tax code. They also have the option under Section 168(k) of expensing half of the cost of qualified assets they buy and place in service the same year. Many assets qualify for both allowances.

Expensing is the most accelerated form of depreciation. As a result, it has the potential to stimulate business investment by reducing the cost of capital for favored investments and increasing the cash flow of firms making such investments. This explains why economists view the two allowances as a significant investment tax subsidy.

The 112th Congress passed one measure that altered the two allowances. Under the American Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240), the Section 179 allowance was increased to $500,000 and the phaseout threshold to $2 million for qualified assets acquired and placed in service in 2012 and 2013. In addition, the act extended the 50% bonus depreciation allowance that was available in 2012 through 2013. Several bills have been introduced in the 113th Congress to extend and enhance the two allowances.

This report examines the current status, legislative history, and main economic effects (including their efficacy as an economic stimulus tool) of the Section 179 and bonus depreciation allowances. It also identifies legislative initiatives in the 113th Congress to modify either allowance.

Current Expensing Allowances

Section 179

Under Section 179 of the Internal Revenue Code (IRC), firms in all lines of business and all sizes have the option, within certain limits, of expensing part or all of the cost of new and used qualified property (or assets) they acquire in the year when the assets are placed in service. Business taxpayers that cannot or choose not to claim the allowance may recover capital costs over longer periods by claiming the appropriate depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS) or Alternative Depreciation System (ADS).

Maximum Expensing Allowance

The maximum Section 179 expensing allowance is set at $500,000 for qualified assets bought and placed in service in 2013. Assuming no change in current law, the allowance drops to $25,000 in 2014 and thereafter.

Qualified Property

Current law defines property that qualifies for the allowance as new and used tangible property -- as specified in IRC Section 1245(a)(3) -- that is depreciable under IRC Section 168 (which holds the MACRS) and acquired for use in the active conduct of a trade or business. With a few exceptions, this property consists of machines and equipment used in manufacturing, mining, transportation, communications, the generation and transmission of electricity, gas and water distribution, and sewage disposal. Most buildings and their structural components (including heating and air conditioning units and lodging facilities) do not qualify for the allowance. But an exception is made for the 2010 to 2013 tax years: taxpayers may expense up to $250,000 of the cost of qualified leasehold improvements, qualified retail improvement property, and qualified restaurant improvement property incurred in each tax year during that period. Research and bulk storage facilities do qualify for the allowance, as do single-purpose agricultural structures, storage facilities for petroleum products, and railroad grading and tunnel bores. In addition, the cost of off-the-shelf computer software that is depreciable in three years and placed in service from 2003 to 2013 may be expensed under Section 179.

Limitations on Use of the Section 179 Allowance

Use of the allowance is subject to two limitations: an investment (or dollar) limitation and an income limitation.

Under the dollar limitation, the maximum allowance is reduced, dollar for dollar but not below zero, by the amount by which the aggregate cost of qualified property a firm buys and places in service during a tax year exceeds what is often referred to as a phaseout threshold. The threshold is set at $2 million in 2013 and is scheduled to fall to $200,000 in 2014 and thereafter. (See Table 1 for the amounts in tax years before 2013.) As a result, a taxpayer may claim no Section 179 expensing allowance in 2013 when the total cost of qualified property it acquires and places in service that year reaches $2.5 million or more.

The income limitation bars a taxpayer from claiming an allowance greater than its taxable income (including wages and salaries) from the active conduct of a trade or business. It is determined after the application of the investment limitation. This means that if a firm has $25,000 in taxable income from a business but may claim a Section 179 allowance no larger than $20,000 under the investment limitation, it could expense up to $20,000 of the cost of qualified property and recover the remainder under the MACRS, if applicable. Though taxpayers cannot carry forward any allowance that is denied because of the investment limitation, they may carry forward indefinitely any allowance that is denied because of the income limitation.

Claiming the Allowance

Historically, an election to claim the Section 179 allowance could be revoked only with the consent of the Internal Revenue Service (IRS). But this rule has been suspended for the tax years from 2002 to 2013. During this time, a taxpayer may revoke any portion of an election to expense qualified property without the IRS's consent, regardless of whether the election was made on an original or amended return (IRS regulation 1.179-5). A revocation is made by submitting an amended tax return for the tax year in question. To claim the allowance, a taxpayer must specify on Form 4562 the items to which the election applies and the portion of the cost of each item that is to be deducted immediately.

               Table 1. Maximum Expensing Allowance and

 

                Investment Limitation from 1987 to 2014

 

 ______________________________________________________________________

 

 

 Year              Maximum Expensing Allowance    Investment Limitation

 

 ______________________________________________________________________

 

 

 1987-1992                    $10,000                    $200,000

 

 1993-1996                    $17,500                    $200,000

 

 1997                         $18,000                    $200,000

 

 1998                         $18,500                    $200,000

 

 1999                         $19,000                    $200,000

 

 2000                         $20,000                    $200,000

 

 2001 and 2002                $24,000                    $200,000

 

 2003                        $100,000                    $400,000

 

 2004                        $102,000a                   $410,000a

 

 2005                        $105,000a                   $420,000a

 

 2006                        $108,000a                   $430,000a

 

 2007                        $125,000                    $500,000

 

 2008 and 2009               $250,000                    $800,000

 

 2010 and 2011               $500,000                  $2,000,000

 

 2012                        $500,000                  $2,000,000

 

 2013                        $500,000                  $2,000,000

 

 2014 and thereafter          $25,000                    $200,000

 

 _____________________________________________________________________

 

 

 Source: Internal Revenue Service, revenue procedures dating

 

 back to 1987

 

 

                              FOOTNOTE TO TABLE 1

 

 

      a The $100,000 figure for the maximum allowance and the

 

 $400,000 figure for the investment limitation were both indexed for

 

 inflation from 2004 to 2006.

 

END OF FOOTNOTE TO TABLE 1

 

 

Bonus Depreciation Allowance

Besides the Section 179 expensing allowance, taxpayers have had in recent years the option of claiming an additional first-year (or bonus) depreciation allowance that entered the tax code (§ 68(k)) in 2002 and is scheduled to last through 2013, under current law. The allowance speeds up the depreciation of qualified property, increasing the present value of the tax savings from depreciation. As such, it is intended to stimulate more business investment in the short run than otherwise would occur.

The initial bonus depreciation allowance was a 30% first-year depreciation deduction included in the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147). It applied to property eligible for depreciation under the MACRS with recovery periods of 20 or fewer years, water utility property, off-the-shelf computer software, and qualified leasehold property. This property had to be acquired between September 12, 2001, and December 31, 2004, and placed in service before January 1, 2005. Taxpayers claiming the allowance had to be the original user of the property. They could apply it against the regular income tax and the AMT with no adjustments.

Under current law, a 50% bonus depreciation allowance is available for the same property acquired and placed in service in 2013. It is scheduled to expire on December 31, 2013. C corporations have the option under Section 168(k)(4) to claim a portion of their unused alternative minimum tax (AMT) credits from tax years before 2006, in lieu of any bonus depreciation allowance they could take in 2013. The accelerated credit is refundable and limited to a corporation's bonus depreciation amount for the tax year. This amount cannot exceed what is known as the "maximum increase amount," which is the lower of 6% of the sum of the corporation's unused AMT credits from tax years before 2006 or $30 million. In 2008, 2009, and 2010, corporations were allowed to claim both unused AMT and research credits from tax years before 2006, in lieu of any bonus depreciation allowance it could take.

Interaction with Other Depreciation Allowances, Including the Section 179 Allowance

In the case of assets that are eligible for both expensing allowances, a taxpayer is required to recover their cost in a prescribed order. The expensing allowance must be taken first, lowering the taxpayer's basis in the asset by that amount. If there still is a basis, the taxpayer then may apply the bonus depreciation allowance to that amount, further reducing her basis in the property. Finally, the taxpayer is allowed to claim a depreciation allowance under the MACRS for any remaining basis, using the double declining balance method.

A simple example can show how this procedure is supposed to work. Assume that the only investment a company makes in 2013 is the acquisition of 10 new machine tools at a total cost of $700,000. Such a purchase qualifies for both the expensing and bonus depreciation allowances for that year. It would recover that cost as follows:

  • First, the company takes a Section 179 expensing allowance of $500,000 on its federal tax return for that year, lowering its basis in the property to $200,000 ($700,000 - $500,000).

  • Then it claims a bonus depreciation allowance of $100,000 ($200,000 x 0.5), further lowering its basis to $100,000 ($200,000 - $100,000).

  • Next, the company takes a deduction for depreciation under the MACRS on the remaining $100,000. Given that the MACRS recovery period for machine tools is five years and five-year property is depreciated with the double-declining-balance method, it is permitted claim an additional depreciation allowance equal to 20% of $100,000, or $20,000, using the half-year convention.

  • The company recovers the remaining basis of $80,000 ($100,000 - $20,000) by taking MACRS depreciation deductions over each of the next five years at rates of 32%, 19.2%, 11.52%, 11.52%, and 5.76%, respectively.

  • Thus, the company writes off nearly 89% of the cost of the machine tools in the year they were bought and placed in service: 2013.

 

Legislative History of the Two Expensing Allowances

Section 179

The Section 179 expensing allowance originated as a special first-year depreciation allowance that Congress included in the Small Business Tax Revision Act of 1958 (P.L. 85-866). Its purpose was the same as the current allowance: reduce the tax burden on small business owners, stimulate small business investment, and simplify tax accounting for smaller firms. The original deduction was limited to $2,000 (or $4,000 in the case of a married couple filing a joint return) of the cost of new and used business machines and equipment with a tax life of six or more years.

No change was made in the special allowance until the enactment of the Economic Recovery Tax Act of 1981 (ERTA; P.L. 97-34). ERTA raised the expensing allowance to $5,000 and laid down a timetable for gradually increasing the allowance to $10,000 by 1986. In spite of the substantial increase in the allowance, few firms took advantage of it. Some attributed the tepid response to the limitations on the use of an investment tax credit that ERTA established. A business taxpayer could claim the credit only for the portion of an eligible asset's cost that was not expensed; so the full credit could be used only if the company claimed no expensing allowance. For many firms, the tax savings from the credit alone reportedly outweighed the tax savings from combining the credit with the allowance.

In an effort to stop the growth in the federal budget deficit in the early 1980s, Congress passed the Deficit Reduction Act of 1984 (P.L. 98-369). Among other things, the act postponed from 1986 to 1990 the scheduled increase in the expensing allowance to $10,000. Use of the allowance rose markedly following the repeal of the investment tax credit by the Tax Reform Act of 1986.

With the backing of Congress, the allowance rose to $10,000 in 1990, as scheduled, and remained at that level until the passage of the Omnibus Budget Reconciliation Act of 1993 (OBRA93; P.L. 103-66). OBRA93 increased the allowance to $17,500 (as of January 1, 1993) and created a variety of tax benefits for impoverished areas designated as enterprise zones and empowerment zones. The benefits included an enhanced expensing allowance for qualified assets placed in service in an EZ.1 To be designated as an EZ, an area had to meet a variety of eligibility criteria relating to population, poverty rate, and geographic size.

With the enactment of the Small Business Job Protection Act of 1996 (P.L. 104-188), the regular allowance again moved upward but with a difference: scheduled annual (with one exception) increases over six years. Specifically, the act raised the maximum allowance to $18,000 in 1997, $18,500 in 1998, $19,000 in 1999, $20,000 in 2000, $24,000 in 2001 and 2002, and $25,000 in 2003 and thereafter.

The Community Renewal Tax Relief Act of 2000 (P.L. 106-554) added so-called renewal communities (RCs) to the list of special areas and granted them the same tax benefits available to businesses in EZs, including the enhanced expensing allowance. In addition, it increased the premium for the allowance for qualified assets placed in service in special areas (including RCs) to $35,000 above the regular allowance.

In response to the economic losses associated with the terrorist attacks of September 11, 2001, Congress established a variety of tax benefits through the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) to encourage new business investment in the section of lower Manhattan in New York City that bore the brunt of the aerial attacks on the World Trade Center. The act designated this area as the New York "Liberty Zone." Among the tax benefits offered to firms operating in the zone was the same enhanced expensing allowance for qualified investments in EZs and RCs.

After the enactment of the Small Business Jobs Protection Act, no change was made in the allowance until the passage of JGTRRA. Under the act, the allowance rose four-fold to $100,000 (as of May 6, 2003), was to stay at that amount in 2004 and 2005, and then reset in 2006 and beyond at its level before JGTRRA ($25,000). JGTRRA also raised the phaseout threshold to $400,000 from May 2003 to the end of 2005, indexed the regular allowance and the threshold for inflation in 2004 and 2005, and added off-the-shelf software for business use to the list of depreciable assets eligible for expensing in the same period.

The American Jobs Creation Act of 2004 (AJCA; P.L. 108-357) extended the changes made by JGTRRA through the end of 2007.

In an effort to aid economic recovery in the areas of Louisiana, Mississippi, and Alabama devastated by Hurricane Katrina in 2005, Congress passed the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). Among other things, the act created what was known as a Gulf Opportunity Zone (GOZ) in those areas and offered a variety of tax incentives for business investment in the GOZ, including an enhanced expensing allowance for qualified assets purchased on or after August 28, 2005, and placed in service by December 31, 2007. This allowance could be as much as $100,000 above the regular allowance, with a phaseout threshold that was $600,000 greater than that for the regular allowance. And the enhanced GOZ allowance applied to more assets than the regular allowance.

The Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) extended the changes in the allowance under JGTRRA through 2009.

Under the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Appropriations Act, 2007 (P.L. 110-28), Congress further extended the changes in the allowance made by JGTRRA through 2010, raised the maximum allowance to $125,000 and the phaseout threshold to $500,000 for 2007 to 2010, and indexed both amounts for inflation in that period. The act also extended through 2008 the special GOZ allowance.

In an effort to boost business investment in the midst of an accelerating economic downturn, Congress increased the allowance to $250,000 and the phaseout threshold to $800,000 in 2008 only, by passing the Economic Stimulus Act of 2008 (ESA; P.L. 110-185). Those amounts were supposed to reset at $125,000 and $500,000 in 2009 and 2010, with adjustments for inflation.

During the 111th Congress, the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) extended the enhanced allowance created by ESA through 2009, and the Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) extended it through 2010.

Under the Small Business Jobs Act of 2010 (P.L. 111-240), the maximum amount a taxpayer can expense was increased to $500,000, and the phaseout threshold was raised to $2 million, for tax years beginning in 2010 and 2011.

The Tax Relief, Unemployment Compensation Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) raised the maximum expensing allowance to $125,000 and the phaseout threshold to $500,000 for the 2012 tax year, indexed those amounts for inflation, set the maximum allowance at $25,000 and the phaseout threshold at $200,000 for the 2013 tax year and each tax year thereafter, and extended through 2012 the eligibility of purchases of off-the-shelf computer software for the allowance.

Facing a number of key policy issues, including continuing weakness in job creation and economic growth, the 112th Congress passed the American Taxpayer Tax Relief Act of 2012 in early 2013. Among other things, the act retroactively increased the maximum expensing allowance to $500,000 and the phaseout threshold to $2 million for the 2012 and 2013 tax years. It also made purchases of off-the-shelf software eligible for the allowance in 2013 and extended through 2013 a $250,000 expensing allowance for leasehold property improvements that first became available in 2010.

Bonus Depreciation Allowance

The Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) created the initial bonus depreciation allowance. It was equal to 30% of the adjusted basis of new qualified property acquired after September 11, 2001, and placed in service no later than December 31, 2004. A one-year extension of the placed-in-service deadline was available for certain property with a MACRS recovery period of 10 or more years and for transportation equipment.

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27), the allowance became 50% for the same qualified property acquired after May 5, 2003, and placed in service before January 1, 2006. A one-year extension of that deadline was available for the same qualified property.

Congress passed the Economic Stimulus Act of 2008 in response to the financial crisis that emerged with devastating effects in the late summer and early fall of that year. Included in the act was a reinstatement of the 50% bonus depreciation allowance that had expired at the end of 2005. To claim the allowance, a taxpayer had to acquire qualified property after December 31, 2007, and place it in service before January 1, 2009.

Later in 2008, Congress passed a measure (the Housing Assistance Tax Act of 2008) intended to ease the impact of the financial crisis on the domestic housing market. It included a provision that gave corporations the option of trading any bonus depreciation allowance they could claim for eligible property acquired between April 1 and December 31, 2008, for a refundable tax credit equal to the lesser of $30 million or 6% of the sum of any research and AMT credits that could be carried forward from tax years before 2006. Corporations choosing the option were required to depreciate the property that qualified for the allowance under the MACRS using the straight-line method; no AMT adjustment for depreciation was required.

The American Recovery and Reinvestment Act of 2009 (P.L. 111-5) extended the deadlines by one year, to the end of 2009, for both the 50% bonus depreciation allowance and for the option of monetizing a portion of unused research and AMT credits from tax years before 2006.

Congress extended the 50% allowance so that it and the option to exchange it for an accelerated research and AMT credit applied to qualified property acquired and placed in service in 2010 by passing the Small Business Jobs Act of 2010 (P.L. 111-240).

Under the Tax Relief, Unemployment Compensation Reauthorization, and Job Creation Act of 2010 (P.L. 111-312), the bonus depreciation allowance increased to 100% for qualified property acquired after September 8, 2010, and placed in service before January 1, 2012. The act also established a 50% allowance for property acquired and placed in service in 2012. And it allowed corporations to claim a refundable credit for unused AMT credits (but not unused research credits) from tax years before 2006 in lieu of a bonus depreciation allowance for qualified property they acquired between January 1, 2011, and December 31, 2012.

The American Taxpayer Relief Act of 2012 included an extension of the 50% bonus depreciation allowance through the end of 2013. ATRA also extended through 2013 the option to claim a refundable credit for unused AMT credits from tax years before 2006 instead of the bonus depreciation allowance to qualified property acquired and placed in service in 2013.

Legislative Initiatives in the 113th Congress to Modify the Two Expensing Allowances

The outlook in the current Congress for legislation extending or otherwise modifying the depreciation allowances is uncertain. A key source of this uncertainty is disagreements between and among Democratic and Republican leaders in the House and Senate over how to reform the federal tax code and whether to do so in a revenue-neutral fashion. In principle, both parties seem to endorse the idea of simplifying the tax code. But doing so is likely to entail reducing or eliminating a variety of existing tax breaks, possibly including the Section 179 and Section 168(k) expensing allowances. Since the allowances appear to enjoy substantial support within the business community, especially among smaller firms, curtailing or eliminating them could prove politically difficult. Representative Dave Camp, the chairman of the Ways and Means Committee, has vowed to complete a tax reform measure by the end of 2013, while Senators Max Baucus and Orrin G. Hatch, the chairman and ranking minority member of the Senate Finance Committee, respectively, have asked all Senators to identify by July 26 the tax breaks they would like to see retained in any tax reform bill the Senate considers. Neither committee chairman has introduced a tax reform bill in the current Congress.

Section 179 Expensing Allowance

House Bills

H.R. 408 would repeal all limitations on the use of the expensing allowance, effectively allowing companies to expense the entire cost of any qualified asset placed in service starting with the tax year when the bill is enacted.

Senate Bills

S. 1085 would permanently set the maximum expensing allowance at $250,000 and the phaseout threshold at $800,000, adjust those amounts for inflation beginning in the 2015 calendar year, permanently include computer software among the assets eligible for the allowance, and permanently extend the current $250,000 expensing allowance for purchases of qualified real property: leasehold improvement, restaurant, and retail improvement property.

President's Budget Request for FY2014

President Obama's budget request for FY2014 calls for permanently extending the current $500,000 maximum expensing allowance and the current $2 million phaseout threshold, indexing those amounts and the maximum expensing allowance for sport utility vehicles for inflation beginning in 2014, and permanently including computer software among the assets that qualify for the allowance.2 Under the proposal, however, the allowance would not apply to qualified real property after 2013. The revenue cost of the proposal is an estimated $37.7 billion from FY2014 to FY2018 and $68.7 billion from FY2014 to FY2023.

Bonus Depreciation Allowance

House Bills

H.R. 2373 would extend the current allowance through 2017 or 2018 (depending on the production period for the qualifying property) and raise the allowance to 100% for property acquired between January 1, 2013, and December 31, 2017, and placed in service by the end of 2017 or 2018 (again depending on the production period for the qualifying property). The bill would also extend through 2017 the option to exchange any bonus depreciation a corporation could claim for a limited amount of its unused AMT credits from tax years before 2006.

Senate Bills

S. 494 would expand the range of assets eligible for bonus depreciation to include "dairy producing calves and cows."

S. 1085 would apply the current bonus depreciation allowance and the option to monetize unused AMT credits from tax years before 2006 in lieu of bonus depreciation through 2015 or 2016 (depending on the production period for the qualifying property).

S. 1287 would increase the limit for the 2013 tax year only on the unused AMT credits from tax years before 2006 that a corporation could claim in lieu of bonus depreciation.

President's Budget Request for FY2014

The President's FY2014 budget request contains no provision that would extend or otherwise modify the current bonus depreciation allowance.

Economic Effects of the Section 179 and Bonus Depreciation Allowances

Many lawmakers see the Section 179 expensing allowance as a useful and desirable policy tool for promoting the growth of small firms and stimulating the economy. Many small business owners view the allowance as a valuable and necessary tax benefit in that it raises after-tax rates of return on investments in qualified property and simplifies tax accounting.

But in the minds of many public finance economists and other analysts, the allowance represents a source of inefficiency in the allocation of resources within the U.S. economy. In their view, the allowance has the potential to affect the allocation of capital within the economy, the distribution of the federal tax burden among income classes, and the cost of tax compliance for smaller firms in ways that might lead to inefficient or less equitable outcomes. These effects correspond to three traditional criteria for evaluating tax policy: efficiency, equity, and simplicity. Each is discussed below, following a review of what is known about the effectiveness of expensing allowances in general as a policy tool for economic stimulus.

The Allowances as Tools for Economic Stimulus

Since 2003, six bills have been enacted that included either a temporary enhancement of the Section 179 expensing allowance and the phaseout threshold, or a temporary extension of an already enhanced allowance: JGTRRA, the Economic Stimulus Act of 2008, ARRA, SBJA, TRUCA, and ATRA. Since 2002, seven bills have been enacted to extend or enhance the bonus depreciation allowance. Each one was intended, in part, to spark an increase in small business investment, as part of a broader government-financed effort to stimulate the economy. It was reasonable to expect that these measures would have such an effect, since expensing lowers the user cost of capital for investment in qualified property and expands the short-term cash flow of companies that claim it.

The user cost of capital plays a significant role in a firm's investment decisions. This cost represents the opportunity cost of an investment (i.e., the highest pre-tax rate of return a company could earn by investing the same amount in a low-risk asset like a Treasury bond) and its direct costs, such as depreciation, the actual cost of the asset, and income taxes.3 In effect, the user cost of capital establishes the after-tax rate of return an investment must earn in order to be profitable -- and thus worth undertaking. In general, the higher the user cost of capital, the fewer projects a firm can profitably undertake, and the lower its desired capital stock. In theory, when a shift in tax policy decreases the user cost of capital, many firms would respond by increasing the amount of capital they wish to own, boosting overall business investment in the short run.

How does expensing affect the user cost of capital? As the most accelerated form of depreciation, expensing lowers the cost of capital by reducing the tax burden on the returns to an investment. This reduction can be considerable.4 Allowing a firm to expense the cost of an asset is equivalent to the U.S. Treasury providing the firm with a tax rebate equal to the firm's marginal tax rate multiplied by the cost of the asset. Several recent studies have shown that investment in equipment is somewhat sensitive to changes in the user cost (or rental price) of capital. Estimates of the price elasticity of demand for equipment (which is the percentage change in spending on equipment divided by the percentage change in the user cost of capital) range from -0.25 to -0.66, with some economists maintaining the elasticity is probably close to -0.50.5 An elasticity of that size means that a 10% decline in the user cost of capital should result in a 5% rise in business spending on equipment, all other things being equal.

Cash flow can also affect the investment behavior of firms.6 A firm's owners or senior managers may prefer to finance new investment from retained earnings in order to limit their exposure to external debt and the risk of default it entails. Or retained earnings may be the only feasible option for financing new investment for firms that have limited or no access to debt and equity markets because the owners know more about their services and products and potential for growth than investors and lenders, including banks. For firms in this position, the cost of internal funds is lower than the cost of external funds, which means they would be better off financing new investments out of retained earnings. Expensing can increase a firm's cash flow in the short run because it allows the firm to deduct the full cost of qualified assets in the tax year the firm places them into service.

Still, the impact of increases in cash flow on business investment remains uncertain. Some studies have found a significant positive correlation between changes in a firm's net worth and its investment spending.7 This correlation was strongest for firms with very limited access to debt and equity markets. Yet it would be a mistake to interpret these findings as conclusive proof that firms with relatively high cash flows invest more than firms with relatively low or negative cash flows. After all, a strong correlation between two factors does not necessarily mean that one is a main cause of the other. It may be the case that firms with relatively high cash flows invest more, on average, than firms with relatively low cash flows for reasons that have little or nothing to do with the relative cost of internal and external funds.8 The relationship between cash flow and business investment is complicated, and further research is needed to clarify it.

These considerations suggest that an enhanced Section 179 or generous bonus depreciation allowance has the potential to boost small business investment in the short run. They also raise the question of how effective expensing has been as a tool for economic stimulus, both absolutely and relative to other policy options.

There are several reasons to believe that an enhanced Section 179 allowance or generous bonus depreciation allowance would be likely to have no more than a modest effect on the economy during a downturn or period of stagnant growth. The design of each sharply limits their potential to affect economic activity. Neither allowance has affected investments in inventory, structures, and land. And among qualified assets, each provides a greater tax benefit for investment in longer-lived items (such as machine tools) than it does for investment in shorter-lived ones (such as computer systems). Consequently, spending on assets eligible for the allowances tends to account for a small slice of business investment. One measure of this relationship is the value of depreciation allowances claimed by businesses in a tax year. According to corporate income tax data made available by the IRS through its website, corporations claimed a total of $609.8 billion in depreciation allowances for the 2009 tax year. Of that amount, Section 179 allowances amounted to $7.8 billion (or 1.3% of the total amount) and bonus depreciation allowances came to $137.4 billion (or 22.5% of the total amount).9

In addition, expensing is likely to have less of a stimulative effect when an economy is mired in a recession or growing too slowly to reduce the unemployment rate than when it is growing robustly. This is because business investment in general is driven more by the short-to-medium-term outlook for sales and economic growth than it is by temporary tax incentives. Thus, an increase in an expensing allowance when the economy is contracting and more and more companies, large and small, have excess capacity is more likely to affect the timing of planned qualifying investments than the amount of those investments. Companies may be able to accelerate some planned investments to take advantage of an enhancement in an expensing allowance, but little new investment would be likely to occur while the sales and profit outlook for most companies remains bleak, the availability of a relatively generous but temporary expensing allowance notwithstanding.

Three studies (two from 2006 and the other from 2007) provide additional support for the view that temporary accelerated depreciation is largely ineffective as a policy tool for economic stimulus. In one study, Matthew Knittel of the Office of Tax Analysis at the Treasury Department found that take-up rates for the bonus depreciation allowances available from 2002 to 2004 ranged from 54% to 61% for C corporations and from 65% to 70% for S corporations.10 Knittel attributed the surprisingly low rates to an increase in that period in the number of firms that had relatively large stocks of accumulated net operating losses. He also pointed to the many states that elected not to change their tax codes to include bonus depreciation allowances as another contributing factor.

A second study found that though over half of all C and S corporations claimed bonus depreciation in the 2002-2004 tax years, a variety of surveys indicated that no more than 10% of companies deemed the allowances an important consideration in determining the timing or level of qualifying investments.11 This suggested that many of the investments in that period that benefited from bonus depreciation would have been made without it.

Another study found that although the impact of bonus depreciation on gross domestic product and employment may have been modest, it might have had a substantial impact on the composition of business investment, boosting demand for qualified assets. The researchers, Christopher House and Matthew Shapiro, estimated that bonus depreciation may have resulted in a cumulative increase in GDP between 0.07% and 0.14%, and in overall employment between 100,000 and 200,000, in 2002 and 2003.12

Furthermore, there is anecdotal evidence that the current bonus depreciation allowance has made little or no difference in the investment plans of some companies, while accelerating the timing of planned investments by other companies to take advantage of the tax savings.13 These findings hardly back the notion that temporary investment tax subsidies can serve as an effective tool for stimulating the economy.

The forces constraining the stimulative potential of accelerated depreciation, particularly in a weak economy, suggest that the two expensing allowances examined here would have relatively little bang for the buck as a means of boosting economic activity. Other approaches may produce better results, especially those that would quickly put more money in the hands of the unemployed. A 2010 analysis by the Congressional Budget Office (CBO) lent some credence to this notion. It estimated that increasing financial aid to the unemployed would increase GDP from $0.70 to $1.90 for each $1.00 of budgetary cost from 2010 to 2015; by contrast, allowing full or partial expensing of investment costs would raise GDP from $0.20 to $1.00 for each $1.00 of budgetary cost.14

Efficiency Effects

Efficiency lies at the core of economic theory and analysis. In essence, it refers to the allocation of resources in an economy and how that allocation simultaneously affects the welfare of consumers and producers. When the allocation of resources yields the greatest possible economic surplus -- which is defined as the total value to consumers of the goods and services they purchase minus the total cost to sellers of providing the goods and services -- the allocation is said to be efficient. But when the allocation is inefficient, some of the possible gains from exchanges among buyers and sellers are not realized. For example, economists deem an allocation of resources inefficient when most suppliers of a good fail to produce it at the lowest marginal cost permitted by current technology. In this case, a shift in supply from high-cost producers to low-cost producers, driven by consumers seeking greater value, would lower the economic cost of providing the good, perhaps increasing the economic surplus.

Expensing is equivalent to exempting from taxation the normal returns on investment. As such, it would be the preferred option for capital cost recovery under some kind of consumption tax, such as a flat tax or a value-added tax. But under an income tax, expensing becomes a tax preference or benefit because it allows the normal returns on investment to go untaxed. When this happens, new opportunities for tax arbitrage open up. Expensing allows taxpayers to borrow funds to purchase new depreciable assets, deduct the full cost of those assets in the year they are placed in service, and deduct interest payments on the debt incurred to acquire the assets.

How does the expensing allowance affect the allocation of capital within an economy? In theory, all taxes, except lump-sum taxes, generate inefficient economic outcomes, because they influence the decisions of consumers and producers in ways that leave one group or the other, or both, worse off. Non-lump-sum taxes have this effect because they distort the economic choices facing individual and business taxpayers, leading them to allocate resources on the basis of how taxes affect the costs and benefits of the goods and services they buy and sell, rather than according to their actual costs and benefits. Such a distortion entails what economists call a deadweight loss: a condition where the amount of revenue raised by a tax is less than the loss of economic welfare associated with it.

The Section 179 and bonus depreciation expensing allowances have the potential to distort the allocation of resources in an economy by driving a wedge between favored assets and all other assets regarding their profitability. All other things being equal, expensing increases the after-tax rates of return for favored assets compared with the after-tax rates of return for all other assets. Thus, it could encourage inefficient levels of investment in favored assets, at least in the short run, depriving more productive investments with lower after-tax rates of return of needed capital.

In general, how beneficial is expensing? One way to illustrate its potential tax benefit is to show how expensing affects the marginal effective tax rate on the returns to an investment. This rate encapsulates the tax provisions that affect the returns on an investment and is calculated by subtracting the expected after-tax rate of return on a new investment from the expected pre-tax rate of return and dividing by the pre-tax rate of return. Under expensing, it can be shown that the pre-tax and after-tax rates of return are the same for the investment, which means that full expensing produces a marginal effective tax rate of 0%.

This equivalence between pre- and after-tax rates of return reflects a critical aspect of expensing: it reduces the total after-tax return and total cost for an investment by the same factor: an investor's marginal tax rate.15 For example, if a small business owner's income is taxed at a rate of 35%, and the entire cost of a depreciable asset is expensed, the federal government effectively becomes a partner in the investment with a 35% interest. Through the tax code, the federal government assumes 35% of the cost of the asset by allowing its entire cost to be deducted in the first year of use, but it shares in 35% of the income earned by the investment in subsequent years, assuming no change in the owner's tax rate. At the same time, expensing allows the small business owner to receive 65% of the returns from the investment over its lifetime but to bear only 65% of the cost. Such an outcome implies that for each dollar spent on the asset, the owner earns the same rate of return after taxes as he does before taxes.

Is there evidence that the expensing allowance has contributed to shifts in the size and composition of the domestic capital stock in recent decades? This question is difficult to answer, largely because no studies have been done that assess the impact of the allowance on capital formation over time. Given that the expensing allowance lowers the cost of capital and boosts the cash flow of firms using it, and that investment in many of the assets eligible for the allowance seems somewhat sensitive to changes in the cost of capital, one might be justified in concluding that the allowance has caused domestic investment in those assets to be greater than it otherwise would have been.16 But it can also be argued that much of this investment would have taken place in any event.17 Most economists would agree that investment in the assets eligible for the expensing allowance is driven more by expectations for future growth in sales and profits by firms that use these assets, the nature of the assets, and conditions in debt and equity markets than by tax considerations.18 This view finds some support in available data on use of the expensing allowance: although 22% of corporations filing federal tax returns claimed the allowance from 1999 through 2003, the total value of Section 179 property placed in service was equal to 5% of gross domestic investment in equipment and computer software.19

When seen through the lens of economic theory, the expensing allowance has efficiency effects that may worsen the deadweight loss associated with the federal tax code. Under the reasonable assumption that the amount of capital in the economy is fixed in the short run, a tax subsidy like the allowance is likely to divert some capital away from relatively productive uses and into tax-favored ones. Standard economic theory holds that in an economy devoid of significant market failures and dominated by competitive markets, a policy of neutral or uniform taxation of capital income minimizes the efficiency losses associated with income taxation. But the expensing allowance encourages investment in a specific set of assets by relatively small firms. As such, it represents a departure from the norm of neutral taxation.

In addition, an expensing allowance, like any subsidy targeted at firms of a certain size, gives smaller firms an incentive to limit their growth by restricting investments to take advantage of the allowance. This unintended effect stems from the steady increase in the marginal effective tax rates on the income earned by qualified assets in the allowance's phaseout range ($500,000 to $2 million 2011).20 Douglas Holtz-Eakin, a former director of the Congressional Budget Office, has labeled this incentive effect a "tax on growth by small firms."21

Equity Effects

Equity is another basic concept in economic analysis. It generally refers to the distribution of income among the individuals or households in a particular geographic area.

In the context of income taxation, equity usually denotes the distribution of after-tax household incomes among individuals grouped by income. Economists who analyze the equity effects of income taxes tend to focus on two kinds of equity: horizontal equity and vertical equity. A tax is said to be horizontally equitable if it imposes similar burdens on individuals with similar incomes or living standards. And a tax system is said to be vertically equitable if the burdens it imposes vary according to an individual's or household's ability to pay. The principle of vertical equity provides the basis for a progressive income tax system. Under such a system, an individual's tax liability, measured as a fraction of income, rises with income.

The current federal income tax system may lean more in the direction of vertical equity than horizontal equity. Many individuals with similar incomes before taxes end up in the same tax bracket. But because of the tax preferences (e.g., deductions, preferential rates, deferrals, exclusions, exemptions, and credits) that have been enacted in recent decades, a substantial number of individuals with similar before-tax incomes end up being taxed at different effective rates. At the same time, the income received by those with relatively high pre-tax incomes is generally taxed at higher rates than the incomes of those with relatively low pre-tax incomes.

How does the expensing allowance affect vertical and horizontal equity?

To answer this question, it is necessary to consider the tax benefits associated with the expensing allowance, who receives them, and how they affect the recipients' federal income tax burden. The main tax benefit from the allowance is a reduction in the marginal effective tax rate on the income earned by assets eligible for expensing. How much of a reduction depends critically on the proportion of an asset's cost that is expensed. As was noted earlier, if the entire cost is expensed, then the marginal effective rate on the returns falls to zero.

Yet the allowance does not change the actual marginal rates at which this income is taxed. Accelerated depreciation, such as the Section 179 expensing allowance, does not reduce the federal taxes paid on the stream of income earned by an asset over its useful life. Rather, it allows firms to take a larger share of depreciation deductions for an asset in its first year or two of use than would be possible under the MACRS. This forward shift or acceleration in depreciation allowances raises the present discounted value of the tax savings from depreciation.

Most of the assets eligible for the allowance are held by smaller firms. Therefore, any gains in profits that can be attributed to the allowance end up in the hands of small business owners. Since the tax benefits associated with capital income tend to concentrate in upper-income households, it might be argued that the expensing allowance tilts the federal income tax away from vertical equity. The allowance lowers the effective tax burden on small business income relative to other sources of income. While this effect makes investment in qualified assets more attractive, it does not change the fact that the allowance has no effect on the taxes paid by small business owners over time on the income that can be attributed to the affected assets. Over the useful life of such an asset, the amount of taxes paid on income from it is the same, regardless of whether its cost is expensed or not. As a result, it seems fair to conclude that the allowance has no discernible effect on the distribution of after-tax incomes.

Tax Administration

Yet another policy issue raised by the expensing allowance concerns its impact on the cost of tax compliance for business taxpayers.

Most public finance economists would agree that one of the key elements of a desirable income tax system is relatively low costs for administration and compliance. Research indicates that the administrative cost of a tax system hinges on three factors: (1) the records that must be kept in order to comply with tax laws, (2) the complexity of those laws, and (3) the types of income subject to taxation.

Most public finance economists would also agree that the current federal income tax system fails this test on all counts. In their view, the costs of collecting income taxes and enforcing compliance with the tax laws are needlessly high, and the primary cause is the growing complexity of the federal tax code. Many small business owners have long complained about the costs imposed on them by the record keeping and filings required by the federal income tax.

The expensing allowance addresses this concern by simplifying tax accounting for depreciation. Less time and paperwork are expended in writing off the entire cost of a depreciable asset in its first year of use than in writing off that cost over a longer period using the appropriate depreciation schedules. At the same time, it cannot be denied that the rules governing the use of the allowance add a layer of complexity to the tasks of administering and complying with the tax code.

Tax simplification is a long-standing policy objective for small business owners. A primary motivation for pursuing this goal is the relatively high costs small firms evidently bear in complying with federal tax laws. These costs were the main focus of a 2001 study prepared for the Office of Advocacy at the Small Business Administration. The study estimated that the cost per U.S. employee for tax compliance in 2000 was $665 for all firms, $1,202 for firms with fewer than 20 employees, $625 for firms with 20 to 499 employees, and $562 for firms with 500 or more employees.22 This finding underscores a well-established truth about the costs to firms of tax compliance: namely, these costs are23 regressive to firm size in that, "as a fraction of any of a number of size indicators, the costs are lower for larger companies."

Author Contact Information

 

Gary Guenther

 

Analyst in Public Finance

 

gguenther@crs.loc.gov, 7-7742

 

FOOTNOTES

 

 

1 Firms placing qualified assets in service in an EZ were allowed to claim a maximum allowance that was $20,000 greater than the allowance available in other areas, with a phaseout threshold that was twice as large as that available in other areas.

2 U.S. Department of the Treasury, General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals (Washington: Apr. 2013), p. 23.

3 The user cost of capital is the real rate of return an investment project must earn to break even. In theory, a firm will undertake an investment provided the after-tax rate of return exceeds the user cost of capital. Rosen has expressed this cost in terms of a simple equation. Let C stand for the user cost of capital, a for the purchase price of an asset, r for the after-tax rate of return, d for the economic rate of depreciation, t for the corporate tax rate, z for the present value of depreciation deductions flowing from a $1 investment, and k for the investment tax credit rate. Then C = a x [(r + d) x (1-(t x z)-k)]/(1-t). Under expensing, z is equal to one. By inserting assumed values for each variable in the equation, one sees that C increases as z gets smaller. Thus, of all possible methods of depreciation, expensing yields the lowest user cost of capital. For more details, see Harvey S. Rosen, Public Finance, 6th ed (New York: McGraw-Hill/Irwin, 2002), pp. 407-409.

4 In a 1995 study, Douglas Holtz-Eakin compared the cost of capital for an investment under two scenarios for cost recovery. In one, the corporation making the investment used expensing to recover the cost of the investment; and in the other, the cost was recovered under the schedules and methods permitted by the modified accelerated cost recovery system. He further assumed that the interest rate was 9%, the inflation rate 3%, and the rate of economic depreciation for the asset acquired through the investment 13.3%. Not only did expensing substantially reduce the cost of capital, its benefit was proportional to the firm's marginal tax rate. Specifically, Holtz-Eakin found that at a tax rate of 15%, expensing lowered the cost of capital by 11%; at a tax rate of 25%, the reduction was 19%; and at a tax rate of 35%, the cost of capital was 28% lower. See Douglas Holtz-Eakin, "Should Small Businesses Be Tax-Favored?" National Tax Journal, September 1995, p. 389.

5 See Jonathan Gruber, Public Finance and Public Policy (New York: Worth Publishers, 2005), p. 675; and CRS Report R41034, Business Investment and Employment Tax Incentives to Stimulate the Economy, by Thomas L. Hungerford and Jane G. Gravelle.

6 In the realm of business finance, the term "cash flow" can take on different meanings. Here it denotes the difference between a firm's revenue and its payments for all the factors or inputs used to generate its output, including capital equipment.

7 For a review of the recent literature on this topic, see R. Glenn Hubbard, "Capital Market Imperfections and Investment," Journal of Economic Literature, vol. 36, March 1998, pp. 193-225.

8 Harvey S. Rosen and Ted Gayer, Public Finance, 8th edition (New York: McGraw-Hill Irwin: 2008), p. 448.

9 See http://www.irs.gov/uac/SOI-Tax-Stats-Corporation-Depreciation-Data.

10 Matthew Knittel, Corporate Response to Accelerated Depreciation: Bonus Depreciation for Tax Years 2002-2004, Department of the Treasury, Office of Tax Analysis, Working Paper 98 (Washington: May 2007), http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/ota98.pdf.

11 Darrel S. Cohen and Jason Cummins, A Retrospective Evaluation of the Effects of Temporary Partial Expensing, Federal Reserve Board, Finance and Economics Discussion Series, Working Paper No. 2006-19 (Washington: April 2006), http://www.federalreserve.gov/pubs/feds/2006/200619/200619pap.pdf.

12 Christopher House and Matthew D. Shapiro, Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation, National Bureau of Economic Research, working paper no. 12514 (Cambridge, MA: September 2006), p. 2. http://www.nber.org/papers/w12514.

13 Binyamin Applebaum, "Tax Break Increases Deficit, but May Have a Silver Lining," New York Times, February 3, 2012.

14 Congressional Budget Office, Policies for Increasing Economic Growth and Employment in the Short Term, Statement of Douglas W. Elmendorf, Director, before the Joint Economic Committee, February 9, 2010, table 1, p. 11.

15 Raquel Meyer Alexander, "Expensing," in The Encyclopedia of Taxation and Tax Policy, Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle, eds. (Washington: Urban Institute Press, 2005), p. 129.

16 Two studies from the 1990s found that a 1% decline in the user cost of capital was associated with a rise in business equipment spending of 0.25% to 0.66%. See CRS Report RL31134, Using Business Tax Cuts to Stimulate the Economy, by Jane G. Gravelle.

17 There is some anecdotal evidence to support this supposition. At a recent hearing held by the House Small Business Subcommittee on Tax, Finance, and Exports, Leslie Shapiro of the Padgett Business Services Foundation stated that expensing "may be an incentive in making decisions to buy new equipment, but it's not the dominant force." His firm provides tax and accounting services to over 15,000 small business owners. See Heidi Glenn, "Small Business Subcommittee Weighs Bush's Expensing Boost," Tax Notes, April 7, 2003, p. 17.

18 See Roger W. Ferguson, Jr., "Factors Influencing Business Investment," speech delivered on October 26, 2004, available at http://www.federalreserve.gov/boarddocs/speeches/2004/20041026/default.htm.

19 Various data on business claims for the expensing allowance were obtained via e-mail from the Statistics of Income Division at IRS on March 21, 2006.

20 Jane Gravelle of CRS has estimated that, with a corporate tax rate of 28% and a rate of inflation of 3%, the marginal effective tax rate on the income earned by assets eligible for the expensing allowance is 36% in the phase-out range for the allowance. By contrast, under the same assumptions, the marginal effective tax rate on the income earned by qualified assets is 0% for each dollar of investment in those assets up to $430,000.

21 U.S. Congress, Senate Committee on Finance, Small Business Tax Incentives, hearings on S. 105, S. 161, S. 628, S. 692, S. 867, and H.R. 1215, 104th Cong., 1st sess., June 7, 1995 (Washington: GPO, 1995), pp. 11-12.

22 W. Mark Crain and Thomas D. Hopkins, The Impact of Regulatory Costs on Small Firms (Washington: Office of Advocacy, Small Business Administration, 2001), p. 32.

23 Joel Slemrod, "Small Business and the Tax System," in The Crisis in Tax Administration, Henry J. Aaron and Joel Slemrod, eds. (Washington: Brookings Institution Press, 2004), p. 81.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
Copy RID