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

March 31, 2017

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Format: Chicago

Irem Guceri, and Li Liu. Effectiveness of Fiscal Incentives for R&D: Quasi-Experimental Evidence, (USA: International Monetary Fund, 2017) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Economic sectors, Expenditure, Marginal effective tax rate, Small and medium enterprises, Tax allowances, Tax incentives, Tax policy, Taxes

Keywords: A number of company, Company scheme, Corporation tax returns, Cost of capital, Deduction rate, Global, Growth rate, Investment decision, Marginal effective tax rate, Optimization problem, Quasi-experiment, Representative company, Size proxy, Small and medium enterprises, Tax allowances, Tax credit, Tax incentives, User cost, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/084
Stock No:

WPIEA2017084
ISBN:

9781475591170
ISSN:

1018-5941

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