Effectiveness of Fiscal Incentives for R&D: Quasi-Experimental Evidence

Irem Guceri and Li Liu

No 2017/084, IMF Working Papers from International Monetary Fund

Abstract: With growing academic and policy interest in research and development (R&D) tax incentives, the question about their effectiveness has become ever more relevant. In the absence of an exogenous policy reform, the simultaneous determination of companies’ tax positions and their R&D spending causes an identification problem in evaluating tax incentives. To overcome this identification challenge, we exploit a U.K. policy reform and use the population of corporation tax records that provide precise information on the amount of firm-level R&D expenditure. Using difference-in-differences and other panel regression approaches, we find a positive and significant impact of tax incentives on R&D spending, and an implied user cost elasticity estimate of around -1.6. This translates to more than a pound in additional private R&D for each pound foregone in corporation tax revenue.

Keywords: WP; growth rate; tax credit; deduction rate; cost of capital; Tax incentives; corporation tax returns; quasi-experiment; company scheme; optimization problem; a number of company; representative company; user cost; size proxy; investment decision; Tax allowances; Small and medium enterprises; Marginal effective tax rate; Global (search for similar items in EconPapers)
Pages: 43
Date: 2017-03-31
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Effectiveness of Fiscal Incentives for R&D: Quasi-experimental Evidence (2019)
Working Paper: Effectiveness of fiscal incentives for R&D: quasi-experimental evidence (2015)
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