Do Tax Credits Stimulate R&D Spending? The Effect of the R&D Tax Credit in its First Decade

From Nirupama Rao:

This paper examines the impact of the R&D tax credit between 1981-1991 using confidential IRS data from corporate tax returns. The key advances on previous work are an instrumental variables strategy based on tax law changes that addresses the simultaneity between R&D spending and its user cost and the use of new confidential data. Estimates imply that a ten percent reduction in the user cost of R&D leads the average firm to increase its research intensity—the ratio of R&D spending to sales—by 11 percent in the short-run. Long-run estimates imply that firms do face adjustment costs and further increase spending over the longer-run. Analysis of the components of qualified research shows that wages and supplies account for the bulk of the increase in research spending. Comparisons of the elasticity across firms of different sizes, industries, tax status, multi-national status and credit history are also made. Neither small nor young firms appear more responsive in the static analysis but the dynamic model reveals stronger short-run responses, suggesting that they may face lower adjustment costs or liquidity constraints in financing R&D. Long-run and retiming analyses show no evidence that firms allocate their qualified research spending over time to maximize their R&D tax credits. Elasticities of qualified and total research intensities from a smaller sample suggest firms respond to user cost changes largely by increasing their qualified spending, meaning that what R&D the federal credit deems qualified research is an important margin on which the credit affects firm behavior.

Advertisements

About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
This entry was posted in Uncategorized and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s