Explicit and Implicit Tax Effects of the R & D Tax Credit

Abstract

This paper investigates the effects of the 1981 Research and Development (R&D) tax credit, first, by examining the impact of the credit on the level of R&D investment and, second, by estimating the magnitude of the implicit tax created by the credit. The two effects are interrelated because an increase in the level of R&D investment will increase the demand for R&D inputs, thus reducing the pretax rate of return from R&D activity.1 I test the credit's investment effect using a time-series R&D spending model that includes both factors from the industrial organization literature (to control for nontax effects) and an R&D credit usability variable to capture the incentive created by the credit. Previous research has produced mixed evidence on whether the credit had any positive