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Will the real R&D employees please stand up? Effects of tax breaks on firm-level outcomes

Irem Guceri ()
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Irem Guceri: Oxford University Centre for Business Taxation

International Tax and Public Finance, 2018, vol. 25, issue 1, 1-63

Abstract: Abstract This paper evaluates the effect of tax incentives for research and development (R&D) on R&D spending and employment of R&D staff in a quasi-experimental setting. To do this, I exploit an exogenous reform in UK R&D tax policy, which changed the definition of an SME from firms with fewer than 250 employees to those with fewer than 500 employees. I use the UK Business Enterprise Research and Development Survey (BERD), for which companies do not have an incentive to relabel their ordinary employees or spending as R&D. I find that R&D tax incentives help to increase R&D spending at the company level; this translates to a user cost elasticity between −0.88 and −1.18. Further, the additional R&D generated through the tax relief can be attributed entirely to an increase in the number of R&D employees in the companies’ workforce. Together, these results challenge a common narrative on the role of R&D tax incentives.

Keywords: R&D; Tax credits; Quasi-experiment; Difference-in-differences (search for similar items in EconPapers)
JEL-codes: H25 O30 (search for similar items in EconPapers)
Date: 2018
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