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No Place Like Home: Tax Incentives and the Location of R&D by American Multinationals

In: Tax Policy and the Economy, Volume 8

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  • James R. Hines, Jr.

Abstract

This paper analyzes the effects of the U.S. tax treatment of the R&D activities of American multinationals. Recent evidence indicates that the level of R&D spending is highly sensitive to its after-tax cost. The U.S. Tax Reform Act of 1986 reduced the tax deductions that many American firms can claim for their R&D expenses incurred in the U.S., and on this basis, observers predicted that American firms would react to the tax change by significantly increasing the fraction of their R&D that they perform abroad. Aggregate data indicate that this fraction instead stayed roughly constant, at around 10%. An important reason why U.S. firms did not move more of their total R&D activity offshore is that U.S. tax law provides quite generous treatment of R&D performed in the U.S. for use abroad by firms with excess foreign tax credits, and the Tax Reform Act of 1986 significantly increased the number of American firms with excess foreign tax credits. Hence, the 1986 tax change increased the cost of U.S.-based R&D for some American firms, and reduced it for others, with little impact on the overall fraction of R&D spending that U.S. firms do abroad. One consequence of the tax law changes of the late 1980s is that, by 1991, the tax treatment of foreign-source royalties received by American firms with excess foreign tax credits has five times the revenue impact of the Research and Experimentation Tax Credit.

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This chapter was published in:

  • James M. Poterba, 1994. "Tax Policy and the Economy, Volume 8," NBER Books, National Bureau of Economic Research, Inc, number pote94-3.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10885.

    Handle: RePEc:nbr:nberch:10885

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    References

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    1. Zvi Griliches, 1991. "The Search for R&D Spillovers," NBER Working Papers 3768, National Bureau of Economic Research, Inc.
    2. Andrew B. Lyon & Gerald Silverstein, 1994. "The Alternative Minimum Tax and the Behavior of Multinational Corporations," NBER Working Papers 4783, National Bureau of Economic Research, Inc.
    3. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
    4. Mansfield, Edwin & Teece, David & Romeo, Anthony, 1979. "Overseas Research and Development by US-Based Firms," Economica, London School of Economics and Political Science, vol. 46(182), pages 187-96, May.
    5. Altshuler, Rosanne, 1988. "A Dynamic Analysis of the Research and Experimentation Credit," National Tax Journal, National Tax Association, vol. 41(4), pages 453-66, December.
    6. Zvi Griliches & Jacques Mairesse, 1984. "Productivity and R&D at the Firm Level," NBER Chapters, in: R & D, Patents, and Productivity, pages 339-374 National Bureau of Economic Research, Inc.
    7. Goodspeed, Timothy & Frisch, Daniel, 1989. "U.S. tax policy and the overseas activities of U.S. multinational corporations: a quantitative assessment," MPRA Paper 39389, University Library of Munich, Germany.
    8. Zvi Griliches & Jacques Mairesse, 1981. "Productivity and R and D at the Firm Level," NBER Working Papers 0826, National Bureau of Economic Research, Inc.
    9. Hines, James R, Jr, 1996. " Dividends and Profits: Some Unsubtle Foreign Influences," Journal of Finance, American Finance Association, vol. 51(2), pages 661-89, June.
    10. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
    11. Jeffrey I. Bernstein & M. Ishaq Nadiri, 1988. "Rates Of Return On Physical And R&D Capital And Structure Of The Production Process: Cross Section And Time Series Evidence," NBER Working Papers 2570, National Bureau of Economic Research, Inc.
    12. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1.
    13. Mansfield, Edwin, 1986. "The R&D Tax Credit and Other Technology Policy Issues," American Economic Review, American Economic Association, vol. 76(2), pages 190-94, May.
    14. Kopits, George F, 1976. "Intra-firm Royalties Crossing Frontiers and Transfer-Pricing Behaviour," Economic Journal, Royal Economic Society, vol. 86(344), pages 791-805, December.
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    Cited by:
    1. Aidan Meyler, 1998. "Technology and Foreign Direct Investment in Ireland," Economics Technical Papers 9810, Trinity College Dublin, Department of Economics.
    2. James R. Hines, Jr., 1994. "Taxes, Technology Transfer, and the R&D Activities of Multinational Firms," NBER Working Papers 4932, National Bureau of Economic Research, Inc.
    3. Bloom, Nicholas & Griffith, Rachel & Van Reenen, John, 2000. "Do R&D Credits Work? Evidence From A Panel Of Countries 1979-97," CEPR Discussion Papers 2415, C.E.P.R. Discussion Papers.
    4. Rene Belderbos & Kyoji Fukao & Hyeog Ug Kwon, 2006. "Intellectual Property Rights Protection and the Location of Research and Development Activities by Multinational Firms," Hi-Stat Discussion Paper Series d06-167, Institute of Economic Research, Hitotsubashi University.
    5. James R. Hines, Jr., 1996. "Tax Policy and the Activities of Multinational Corporations," NBER Working Papers 5589, National Bureau of Economic Research, Inc.

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