On the Sensitivity of R&D to Delicate Tax Changes: The Behavior of U.S. Multinationals in the 1980s
James Hines ()
No 3930, NBER Working Papers from National Bureau of Economic Research, Inc
This paper explores the effect of recent U.S. tax changes on the R&D activities of American multinational corporations. Prior to 1986, U.S. multinational firms could deduct all of their domestic R&D expenses against their U.S. income for tax purposes. After 1986, some firms could take only a partial deduction (while other multinationals continued to receive the benefits of 100% deductibility). By comparing the behavior of firms in these two situations (after 1986), it is possible to estimate the responsiveness of R&D to changes in after-tax prices. The results indicate that the price elasticity of demand for R&D lies between -1.2 and -1.6, thereby implying considerably more price sensitivity than is typically assumed to be true of R&D. Based on these results, the 1986 tax change appears to have been responsible for a reduction of between $1.4 billion and $2.2 billion in annual R&D in the United States, in return for $1.2 billion in additional annual tax revenue.
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Published as Studies in International Taxation, edited by Alberto Giovannini, R. Glenn Hubbard, and Joel Slemrod, pp. 149-187. Chicago: The University of Chicago Press, 1993.
Published as On the Sensitivity of R&D to Delicate Tax Changes: The Behavior of U. S. Multinationals in the 1980s , James R. Hines, Jr., R. Glenn Hubbard, Joel Slemrod. in Studies in International Taxation , Giovannini, Hubbard, and Slemrod. 1993
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Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:3930
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