The Consequences of Limiting the Tax Deductibility of R&D

Mary Cowx, Rebecca Lester and Michelle Nessa
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Mary Cowx: Arizona State U
Rebecca Lester: Stanford U
Michelle Nessa: Michigan State U

Research Papers from Stanford University, Graduate School of Business

Abstract: We study the tax payment and innovation consequences of limiting the tax deductibility of research and development (“R&D†) expenditures. Beginning in 2022, U.S. companies are required to capitalize and amortize R&D rather than immediately deduct these expenditures. We utilize variation in U.S. firms’ fiscal year ends to test the effects of the R&D tax change in a difference-in-differences framework. We first document that affected U.S. firms’ cash effective tax rates increase by 11.9 percentage points (62%), on average. We then test and find decreases in R&D investment among domestic-only, research-intensive, and constrained firms. In aggregate, these estimates translate to a reduction in R&D of $12.2 billion in the first year among the most research-intensive firms. Further, we observe decreased capital expenditures and share repurchases among affected companies, suggesting that firms also reduced other types of investment and shareholder payout to meet the increased cash tax liability. The paper provides policy relevant evidence about the significant real effects of limiting innovation tax incentives.

JEL-codes: H25 M41 M48 (search for similar items in EconPapers)
Date: 2024-07
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-ino, nep-pbe, nep-sbm and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:4192

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