	Introduction

The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act ( S. 2260 ) would extend a set of expired tax provisions (including bonus depreciation) through the end of 2015. One of these permanent provisions was bonus depreciation (originally, in H.R. The temporary provisions enacted in the past for only a year or two and extended multiple times are generally referred to collectively as the "extenders." One reason advanced for temporary provisions has been that time is needed to evaluate them. Most of these provisions, however, have been extended multiple times (e.g., the R&D credit has been extended 15 times since 1981) without such an evaluation, which leads some to suggest that these provisions are actually permanent but are extended a year or two at a time because assuming permanence would increase costs in budget projections. Bonus depreciation is not a traditional "extender." It was enacted for a specific, short-term purpose: to provide an economic stimulus during the recession. Its temporary nature is critical to its effectiveness. What Is Bonus Depreciation? If depreciation has a greater present value than economic depreciation the effective tax rate falls below the statutory rate for firm-level taxes on equity investment; if all of the cost is immediately deducted the effective tax rate is zero. The most recent bonus depreciation rule allowed half of the cost of equipment purchased and placed in service in 2013 to be deducted immediately. Bonus depreciation was not the centerpiece of the stimulus; the major tax cut, much larger than bonus depreciation, was an individual tax rebate. The temporary nature of bonus depreciation makes it, in theory, a more effective fiscal stimulus than other investment incentives because it is in the nature of a fire sale. Overall, bonus depreciation did not appear to be very effective in providing short-term economic stimulus compared with alternatives. Bonus Depreciation as a Permanent Provision

If bonus depreciation is permanent, it affects the size and allocation of the capital stock. That makes bonus depreciation a more attractive option for permanent tax subsidies than the investment credit, which substantially favors short-lived assets. Accelerated depreciation exacerbates this negative effect. Under the average 26% effective tax rate for equipment under current law without bonus depreciation, the effective tax rate on debt financed investment is -19%. With bonus depreciation, it is -37%. If bonus depreciation is a permanent feature of the tax code, these estimates should be adjusted. For equipment, the tax rates are two to four percentage points larger; bonus depreciation lowers the U.S. rate to six to seven percentage points below the OECD average. To indicate the nature of the depreciation plan in these proposals, their effective tax rates are discussed with reference to a 35% tax rate, although Wyden-Coats proposes a 24% tax rate, the Senate draft proposes lower rates but does not provide a specific number, and the Camp proposal would lower the rate to 25%. Bonus Depreciation and Revenues

Some have suggested that the traditional extenders have been repeatedly enacted on a temporary basis because the revenue cost is much smaller for a single year's extension compared with a permanent extension with the 10-year budget horizon. Thus, these estimates indicate that a one year extension costs $5 billion for FY2014-FY2024, less than 2% of the cost of $263 billion for a permanent provision. The effective tax rate for an investment financed wholly by equity at the firm level is ( r – R ) / r . 
When including individual level taxes and debt finance, the tax rate is measured by determining r as above, where R = f ( i ( 1 – u ) – π) + ( 1 – f ) E , where f is the share of the investment that is debt financed, i is the nominal interest rate, and E is the real rate of return to equity before individual tax but after the corporate tax.
The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act (S. 2260) would extend expiring provisions, including bonus depreciation. The Jobs for America Act (H.R. 4) would make bonus depreciation permanent. The temporary provisions enacted in the past for only a year or two and extended many times are generally referred to collectively as the "extenders." One reason advanced for these extenders is that time is needed to evaluate them. Most provisions have been extended multiple times, and some suggest they are actually permanent but are extended a year or two at a time because permanent provisions would significantly increase the costs in the budget horizon. Historically, bonus depreciation has not been a traditional "extender."
Bonus depreciation allows half of equipment investment to be deducted immediately rather than depreciated over a period of time. Bonus depreciation was enacted for a specific, short-term purpose: to provide an economic stimulus during the recession. Most stimulus provisions have expired. Bonus depreciation has been in place six years (2008-2013), contrasted with an earlier use of bonus depreciation in place for three years. Is bonus depreciation temporary or permanent? The analysis of bonus depreciation differs for a temporary stimulus provision, compared with a permanent provision that can affect the size and allocation of the capital stock.
A temporary investment subsidy was expected to be more effective than a permanent one for short-term stimulus, encouraging firms to invest while the benefit was in place. Its temporary nature is critical to its effectiveness. Yet, research suggests that bonus depreciation was not very effective, and probably less effective than the tax cuts or spending increases that have now lapsed.
If bonus depreciation is made permanent, it increases accelerated depreciation for equipment, contributing to lower, and in some cases more negative, effective tax rates. In contrast, prominent tax reform proposals would reduce accelerated depreciation. Making bonus depreciation a permanent provision would significantly increase its budgetary cost.
Compared with a statutory corporate tax rate of 35%, bonus depreciation lowers the effective tax rate for equipment from an estimated 26% rate to a 15% rate. Buildings are taxed approximately at the statutory rate. Total tax rates would be slightly higher because of stockholder taxes. Because nominal interest is deducted, however, effective tax rates with debt finance can be negative. For equity assets taxed at an effective rate of 35%, the effective tax rate on debt-financed investment is a negative 5%. The rate on equipment without bonus depreciation is minus 19%; with bonus depreciation it is minus 37%.
If bonus depreciation is permanent, estimates of U.S. effective tax rates reflecting concerns that the U.S. rate is higher than that of other countries overstate the effective U.S. corporate tax rate; U.S. effective tax rates on equipment would be significantly lower than the OECD average.
Moving to permanent bonus depreciation is inconsistent with tax reform proposals made by the Wyden-Coats bill, the Senate Finance Committee Staff discussion draft, and Chairman Camp's proposal. All of these proposals would reduce the current accelerated depreciation for equipment.
The usual extenders cost a fraction of the cost of permanent provisions in a 10-year budget window, but bonus depreciation is a smaller fraction because it is a timing provision. A one-year extension costs $5 billion for FY2014-FY2024, less than 2% of the cost of $263 billion for a permanent provision.