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

Abstract

We exploit a 2008 UK policy reform that increased the tax incentives for R&D in medium-sized enterprises relative to large ones, to overcome the endogeneity of exposure to such tax credits. We estimate a difference-in-difference design on the universe of corporation tax filings in the United Kingdom, combined with other datasets. We find a positive and significant impact of tax credits for R&D, implying a user-cost elasticity estimate of around −1.6. This magnitude implies around $1 in additional private R&D spending per dollar foregone in tax revenue. (JEL H25, H32, K34, L25, O32)

Tax Credits and Small Firm R&D Spending

“…While early research on the impact of R&D tax incentives focused on the United States, some recent studies provide evidence from other countries, including Canada (Dagenais et al, 1997;Baghana and Mohnen, 2009;Czarnitzki et al, 2011), Japan (Yohei, 2011;Koga, 2003), the Netherlands (Lokshin and Mohnen, 2012), the United Kingdom (Dechezleprêtre et al, 2016;Guceri and Liu, 2015) and China (Chen et al, 2017). The results of these studies are broadly consistent with those surveyed in Becker (2015), and with the conclusion in Hall and Van Reenen (2000) that, "A tax price elasticity of around unity is still a good ballpark figure, although there is a good deal of variation around this from different studies as one would expect.…”

Entrepreneurial Spillovers from Corporate R&D

“…There is similar evidence of large positive elasticities for foreign programs, including in Canada and the UK(Dechezleprêtre, Einiö, Martin, Nguyen & Van Reenen 2016, Agrawal et al 2014, and Guceri & Liu 2017.…”

The effects of R&D tax incentives and their role in the innovation policy mix

“…Despite some early suggestive evidence (Eisner et al, 1984), recent studies suggest that relabelling does not appear to be a serious problem in advanced economies. Guceri and Liu (2019), using detailed administrative data for the UK, do not find evidence of such a phenomenon. Agrawal et al (2020) similarly find no evidence of relabelling in Canada, and evidence from US and Australian tax auditors, discussed by Hall and Van Reenen (2000), also does not indicate a substantial relabelling.…”