Will the real R&D employees please stand up? Effects of tax breaks on firm-level outcomes

Abstract

This paper evaluates the effect of tax incentives for research and development (R&D) on R&D spending and employment of R&D staff in a quasi-experimental setting. To do this, I exploit an exogenous reform in UK R&D tax policy, which changed the definition of an SME from firms with fewer than 250 employees to those with fewer than 500 employees. I use the UK Business Enterprise Research and Development Survey (BERD), for which companies do not have an incentive to relabel their ordinary employees or spending as R&D. I find that R&D tax incentives help to increase R&D spending at the company level; this translates to a user cost elasticity between −0.88 and −1.18. Further, the additional R&D generated through the tax relief can be attributed entirely to an increase in the number of R&D employees in the companies' workforce. Together, these results challenge a common narrative on the role of R&D tax incentives.

Tax Incentives for Research and Development and Their Use in Tax Planning

“…However, many of the earlier studies in this area disregard the problem of a selection bias, according to which the recipients of R&D tax credits or super-deductions might systematically differ from the non-recipients. For this reason, recent studies such as Yang et al (2012), Bozio et al (2014), Kobayashi (2014), Guceri (2017) have estimated the effect of R&D tax incentives after meticulously correcting a possible selection bias using the propensity score matching (PSM) technique. This strategy helps to identify comparable companies and to classify and divide them into treatment and control groups.…”

“…A recent study by Guceri (2017) estimates the effect of R&D tax incentives in a quasiexperimental setting. The author exploits a recent reform in the UK, which increased a threshold for small or medium enterprises (SMEs) from 250 to 500 employees.…”

“…This reform changed the composition of companies that were eligible for an R&D tax credit and therefore created a suitable design for an empirical investigation of the treatment effect. Using firm-level data from the UK over the period between , Guceri (2017 argues that tax incentives help to increase R&D spending at a company level. The author finds a user costs elasticity of -1.2, which implies that an introduction of an R&D tax incentive that decreases user costs by 1%…”

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

“…This identify problem of simultaneity between the user cost of capital and investment shocks arises both in the context of incentives for physical investment and in R&D investment. There is, therefore, a recent emphasis on evaluation of R&D policy based on evidence from quasi experiments, which could use changes in the tax price of R&D that are exogenous to firm investment decisions (for instance, Bronzini and Iachini 2014 and working papers by Agrawal and others 2014, Dechezlepretre and others 2016, and Guceri 2017.…”

“…The second important challenge faced by the literature is the scarcity of large-scale, administrative data that accurately reflects the characteristics and choices of the overall population of corporations. For many years, R&D surveys that are standardised across OECD countries have provided an important resource to develop the research that seeks to identify the causal effect of tax incentives for R&D (Lokshin and Mohnen 2012, Lokshin and Mohnen 2013, Mulkay and Mairesse 2013, Guceri 2017. Now, the availability of administrative data, which enables the precise measurement of the firms' marginal tax rates and the rates at which they obtain R&D tax incentives, offers an invaluable opportunity to carry out an accurate analysis of the impact of tax incentives on R&D spending (Rao 2016, forthcoming).…”