Tax Policy Endogeneity: Evidence from R&D Tax Credits

Andrew C. Chang
Additional contact information
Andrew C. Chang: https://www.federalreserve.gov/econres/andrew-c-chang.htm

No 2014-101, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Because policymakers may consider the state of the economy when setting taxes, endogeneity bias can arise in regression models that estimate relationships between economic variables and taxes. This paper quantifies the policy endogeneity bias and estimates the impact of R&D tax incentives on R&D expenditures at the U.S. state level. Identifying tax variation comes from changes in federal corporate tax laws that heterogeneously impact state-level R&D tax incentives due to the simultaneity of state and federal corporate taxes. With this exogenous variation, my preferred estimates indicate a 1 percent increase in R&D tax incentives leads to a 2.8-3.8 percent increase in R&D. Alternatively, estimates that ignore endogenously determined policies indicate that a 1 percent increase in R&D tax incentives leads to a 0.4-0.7 percent increase in R&D. These results are consistent with tax policies that are implemented before an economic downturn.

Keywords: Corporate tax; fiscal policy; R&D price elasticity; tax credits; policy endogeneity (search for similar items in EconPapers)
JEL-codes: H20 H25 H32 H71 K34 O38 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2014-11-21
New Economics Papers: this item is included in nep-acc, nep-ino, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.federalreserve.gov/econresdata/feds/2014/files/2014101pap.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2014-101

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().