I n the 111 th Congress, the American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 ) contained a tax cut for business: temporary 50% bonus depreciation (which allows half of the cost of business equipment investment to be deducted when incurred). That provision extended bonus depreciation, enacted for 2008 in the 2008 stimulus, through 2009. Subsequent legislation retroactively extended the provision through 2010 ( P.L. 111-240 ). At the end of December, 2010, a comprehensive tax bill, P.L. 111-312 , extended bonus depreciation through 2011 and increased the share expensed, as of September 8, to 100%. it provided for 50% bonus depreciation for 2012. Discussed but not enacted were proposals to extend the period of time a loss can be carried back (offsetting prior year taxes and resulting in immediate tax savings) from two to five years. A carryback provision was provided for small business (along with some other small business provisions. P.L. 111-312 also extended the Bush tax cuts, including lower rates on capital gains and dividends, which originated as part of a business-related economic stimulus. 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. Bonus depreciation originated in 2002, when a variety of corporate tax cut proposals were considered as stimulus proposals. 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. On October 24, 2001, the House passed H.R. 3090 , which included temporary partial expensing (for three years), a provision similar to an investment credit. The bill also contained some other provisions, including a repeal of the corporate alternative minimum tax and an extension of net operating loss carrybacks. Proposals developed in the Senate contained business tax cuts as well. The Finance Committee chairman's plan included several tax cuts for business: allowing 10% of investments placed in service to be expensed, an increase in expensing dollar limits for small businesses, and some other provisions. The Finance Republican's plan would have provided 30% expensing and repealed the corporate alternative minimum tax, but without refunding accumulated credits immediately as was the case in H.R. 3090 . The 10%, one year, expensing provision was included in the version of H.R. 3090 that was approved by the Senate Finance Committee on November 8, 2001. This bill did not pass the Senate; however, Majority Leader Daschle proposed a streamlined bill (using H.R. 622 as a vehicle) that would include a 30% one year expensing provision. A final version of H.R. 3090 approved in early March of 2002 included the House expensing provision (two years at 30%). This provision was referred to as bonus depreciation. Further action to address business (and investment) tax cuts occurred in the 108 th Congress. At the beginning of 2003, President Bush proposed corporate tax relief in the form of an exclusion for dividends and a step up in basis. This proposal would have provided tax reductions for corporate income to the investors rather than the firm. The effects would probably be similar to corporate rate cuts in the long run, but may have different effects in the short term. In particular, such cuts might be more likely to be translated into spending because they would be received directly by individuals. In H.R. 2 , enacted in May 2003, a provision allowing a 15% maximum tax rate on both dividends and capital gains was enacted; the provision was originally to be effective through 2008. The 2003 legislation also increased the bonus depreciation rate to 50% and extended it through 2004. Bonus depreciation expired at the end of 2004. As the economy recovered, interest in short run stimulus measures diminished. Short run stimulus again became a topic of concern in the aftermath of Hurricane Katrina. 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. Recent problems in the mortgage markets and concerns about the economy prompted new interest in fiscal stimulus. The stimulus proposal adopted in February 2008 ( P.L. 110 - 185 ) included two major components: an individual income tax rebate and a temporary bonus depreciation similar to that enacted for 2002-2004 (at 50%). 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. 111-315 which returned to 50% expensing through 2012. As noted above, P.L. 112-240 extended bonus depreciation for an additional year. This report discusses issues associated with the use of business tax subsidies as a fiscal stimulus. First, is fiscal policy appropriate? Second, how successful are subsidies likely to be and what form might they take to be most effective? Finally, what other consequences might flow from the use of business tax subsidies, especially if they are to be permanent? Investment subsidies have typically been provided through an investment tax credit. The investment tax credit was originally introduced in 1962 as a permanent subsidy, but it came to be used as a counter-cyclical device. It was temporarily suspended in 1966-1967 (and restored prematurely) as an anti-inflationary measure; it was repealed in 1969, also as an anti-inflationary measure. The credit was reinstated in 1971, temporarily increased in 1975 and made permanent in 1976. After that time, the credit tended to be viewed as a permanent feature of the tax system. At the same time, economists were increasingly writing about the distortions across asset types that arose from an investment credit. The Tax Reform Act of 1986 moved toward a system that was more neutral (within the limits of empirical estimates of depreciation) and repealed the investment tax credit while lowering tax rates. Investment subsidies can also be provided through accelerated depreciation, but these measures tend not to be used for counter-cyclical purposes. At least one reason for not using accelerated depreciation for temporary, counter-cyclical purposes is because such a revision would add considerable complexity to the tax law if used in a temporary fashion, since different vintages of investment would be treated differently. An investment credit, by contrast, occurs the year the investment is made and, when repealed, only requires firms with carry-overs of unused credits to compute credits. An exception to the problem with accounting complexities associated with accelerated depreciation is partial expensing, that is allowing a fraction of investment to be deducted up front and the remainder to be depreciated. This partial expensing approach also is neutral across all assets it applies to, but the cash flow effects are more concentrated in the present (and revenue is gained in the future). A temporary partial expensing provision, allowing 30% of investments in equipment to be expensed over the next two years, was included in H.R. 3090 in 2002 and expanded to 50% and extended through 2004 in tax legislation enacted in 2003. It expired in 2004. The 2008 stimulus proposal ( P.L. 110 - 185 ) returned to bonus depreciation as a stimulus. Historically, corporate rate changes have tended not to be used for counter-cyclical purposes. The interest in corporate tax rate cuts in 2002 appears associated with arguments about the effects of tax changes on stock markets. (A similar argument was made for dividend and capital gains tax cuts.) The repeal of the corporate alternative minimum tax, included in an earlier version of H.R. 3090 in 2001, is similar to a corporate tax rate in some respects, but its effects on marginal investments are uncertain and could possibly discourage investment. A net operating loss carryback provides tax benefits in the same way as a rate cut, but does not stimulate investment, except to the extent it makes the firm able to use other stimulus provisions such as bonus depreciation. It benefits less profitable firms, while a rate reduction benefits more profitable ones (or at least firms with tax liability). Many economists expressed uncertainty about the desirability of an additional fiscal stimulus during the 2002-2003 period and while many economists supported a stimulus more recently in 2008, some uncertainty remained. Moreover, economists have, in general, become more skeptical of fiscal policy as a counter-cyclical tool, particularly through the mechanism of tax cuts. 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. Finally, in an open economy with flexible exchange rates some of the fiscal stimulus can be offset through a decline in net exports, as increased interest rates attract capital from abroad and bid up the price of the dollar. Concerns about the path of the economy in 2007 and 2008 led to proposals for a fiscal stimulus, including support from the chairman of the Federal Reserve Board, as long as the stimulus occurs quickly. Although the economy was not determined to be in recession at that point, slow growth was projected and investment incentives as well as individual tax rebates were under consideration. The final proposal included temporary bonus depreciation for 2008. The economy remained in recession at the beginning of 2009. The serious problems with the current economy led to much wider support among economists for a major fiscal stimulus, and a second, larger stimulus plan ( P.L. 111-5 ) was adopted, which included a provision to extend bonus depreciation through 2009. Although the economy resumed growing in mid-2009, unemployment has remained high.