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.
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