Most of these provisions were made permanent by P.L. 112-240 , the American Taxpayer Relief Act of 2012; bonus depreciation was extended through 2013. Increased interest in providing business tax cuts to stimulate the economy followed the terrorist attacks of September 11, 2001, which heightened concerns about an economic slowdown. Among the tax proposals that were discussed in the 107 th Congress were a corporate rate cut and an investment credit. An investment credit could be considered on either a temporary or a permanent basis. 3090 , which included temporary partial expensing (for three years), a provision similar to an investment credit. Bonus depreciation expired at the end of 2004. As the economy recovered, interest in short run stimulus measures diminished. Dividend relief and lower capital gains rates were extended in legislation passed in 2006, through 2010, although not on the grounds of short-term stimulus. The stimulus proposal adopted in February 2008 ( P.L. Bonus depreciation has been extended and expanded in recent legislation. The American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 ) extended bonus depreciation through 2010; provisions further extended bonus depreciation (in P.L. 111-240 and P.L. 111-315 ), expanded it to 100% for 2011 in P.L. 110 - 185 ) returned to bonus depreciation as a stimulus. When Is Fiscal Policy Needed? Because of lags in decision-making and administrative lags in getting tax cuts to individuals, a fiscal stimulus enacted through a tax cut can be poorly timed. Although a fiscal stimulus delivered through direct spending has a relatively straightforward effect, a fiscal stimulus delivered via a personal tax cut tends to have a more muted effect on the economy because only part of it will be spent. That is, government spending and tax reductions financed by deficits tend to crowd out investment. This last estimate is a much higher estimate than had previously been found and reflects some important advances in statistical identification of the response. Yet, it is not at all clear that this elasticity would apply to stimulating investment in the aggregate during a downturn when firms have excess capacity. Some evidence suggests that the temporary bonus depreciation enacted in 2002 had little or no effect on business investment. Type of Business Tax Cut: Corporate Rate vs. Investment Subsidy

Generally, an investment credit (or other subsidy confined to investment, such as accelerated depreciation) has more "bang for the buck" than a corporate rate cut (or dividend relief) because it does not reduce taxes on the flow of income to existing capital assets. Theoretically, a temporary investment subsidy, like the investment credit, would have a more pronounced effect on investment in the short run than a permanent one, and, of course, would cost much less. As noted above, the empirical evidence suggests that even a temporary subsidy was not very effective as an economic stimulus, although the reasons for that are not entirely clear and studies face many difficulties. It can also easily produce negative tax rates. Accelerated depreciation methods can be designed to be more neutral, and there are several types of investment subsidies that are relatively neutral at least across the assets they apply to (including partial expensing, allowing credits only for investment in excess of depreciation, or varying credits with asset durability). Permanent investment subsidies, while more effective than corporate rate cuts in the short run, will distort the allocation of investment in the long run. Thus the cost of a rate reductions is du (cK - Izg) where zg is the depreciation formula discounted at the growth rate g. Since I equals the effect on today's investment per present value of revenue loss is:
Therefore the ratio of the cost of an investment credit to the cost of a corporate rate reduction is somewhat complicated, but when depreciation is economic depreciation, the ratio simplifies to:
(5) 
[where CoIC = Cost of Investment Credit, CoCRC = Cost of Corporate Rate Cut]. In the case of a depreciating asset, the relationship between pre-tax return and after tax return in the corporate sector is determined by the rental price formula:
(6) 
where is the pre-tax real return, is the after tax discount rate of the firm, d is the economic depreciation rate, u is the statutory tax rate of the firm (equal to the corporate tax rate for corporate production and equal to the individual tax rate for non-corporate production), z is the present value of depreciation deductions for tax purposes, k is the investment tax credit rate, and m is the fraction of k that reduces the basis for depreciation purposes.
Business tax cuts were part of the economic stimulus, included in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), provisions that were subsequently extended (in P.L. 111-240 and P.L. 111-315) by the American Taxpayer Relief Act of 2012, P.L. 112-240. The most important provision is bonus depreciation, which extends to the end of 2013.
Bonus depreciations provisions were enacted in 2002, as increased interest in providing business tax cuts to stimulate the economy followed the terrorist attacks of 2001, which heightened concerns about an economic slowdown. Among the tax proposals discussed at that time were a corporate rate cut and an investment subsidy. A March 2002 tax cut contained temporary partial expensing (bonus depreciation) for equipment. Interest in this issue continued, including proposals by President Bush for reductions in taxes on corporations through temporary dividend relief, which were enacted in May 2003. The temporary bonus depreciation expired at the end of 2004. Dividend relief was extended through 2010 in legislation passed in 2006. Temporary bonus depreciation was also part of a recent fiscal stimulus package adopted in 2008 (P.L. 110-185) and 2009 (P.L. 111-5) and has subsequently been extended and expanded.
Some economists doubt the efficacy of fiscal policy in general even when a stimulus is needed, especially in an open economy and given the difficulties of achieving proper timing. Also, deficit financing of a tax cut has potential negative long run effects because it crowds out investment; a stimulus designed to increase investment spending (rather than consumption spending) would, if successful, reduce that negative effect. Investment subsidies had largely been abandoned as counter-cyclical devices over the last two decades, in part because of lack of evidence from statistical studies relating investment spending to the cost of capital. Some recent empirical evidence has found some larger effects, at least with some studies, although not enough to suggest that all of the tax cut is spent (especially with corporate rate reductions). Moreover, the average behavioral response identified in these studies may be larger than responses during a downturn when many firms have excess capacities, and planning lags may make investment responses poorly timed. Recent studies of the 2002 temporary investment stimulus tended to find it a relatively ineffective stimulus measure.
An investment subsidy has more "bang-for-the-buck" than a corporate rate cut (or dividend relief), since the latter benefits existing as well as new capital. A corporate rate cut is estimated to produce as little as two-thirds of the investment induced by an investment credit with an equivalent revenue loss. The historically most common investment subsidy is the investment credit, although the same effect could be achieved with accelerated depreciation or partial expensing. A temporary investment credit should be more effective than a permanent one, and a temporary investment credit could also be made incremental. (It is not possible to structure a permanent incremental credit.) One disadvantage of a permanent investment credit is that it distorts the allocation of investment and can easily produce negative tax rates. A 10% investment credit would produce negative tax rates in excess of 100% for short-lived assets. Arguments were made for a corporate tax rate cut because of estimated large effects on the stock market. These calculations are overstated because they do not account for the adjustment process and of interest rate increases. Given the uncertainty about the size of stock market effects or their beneficial effect on the economy, there is a case for not considering stock market effects an important factor in choosing an investment subsidy. This report will be updated to reflect major legislative developments.