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On the Sensitivity of R&D to Delicate Tax Changes: The Behavior of U. S. Multinationals in the 1980s

In: Studies in International Taxation

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  • James R. Hines, Jr.
  • R. Glenn Hubbard
  • Joel Slemrod

Abstract

This paper explores the effect of recent U.S. tax changes on the R&D activities of American multinational corporations. Prior to 1986, U.S. multinational firms could deduct all of their domestic R&D expenses against their U.S. income for tax purposes. After 1986, some firms could take only a partial deduction (while other multinationals continued to receive the benefits of 100% deductibility). By comparing the behavior of firms in these two situations (after 1986), it is possible to estimate the responsiveness of R&D to changes in after-tax prices. The results indicate that the price elasticity of demand for R&D lies between -1.2 and -1.6, thereby implying considerably more price sensitivity than is typically assumed to be true of R&D. Based on these results, the 1986 tax change appears to have been responsible for a reduction of between $1.4 billion and $2.2 billion in annual R&D in the United States, in return for $1.2 billion in additional annual tax revenue.
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  • James R. Hines, Jr. & R. Glenn Hubbard & Joel Slemrod, 1993. "On the Sensitivity of R&D to Delicate Tax Changes: The Behavior of U. S. Multinationals in the 1980s," NBER Chapters, in: Studies in International Taxation, pages 149-194, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:7997
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    Cited by:

    1. Lolita Paff & Todd A. Watkins, 2009. "What is the After-Tax Price of R&D? An Interstate Comparison," Fiscal Studies, Institute for Fiscal Studies, vol. 30(1), pages 73-101, March.
    2. Desai, Mihir A. & Hines, James R. Jr., 2002. "Expectations and Expatriations: Tracing the Causes and Consequences of Corporate Inversions," National Tax Journal, National Tax Association;National Tax Journal, vol. 55(3), pages 409-440, September.
    3. Fischer, Carolyn, 2006. "Multinational taxation and international emissions trading," Resource and Energy Economics, Elsevier, vol. 28(2), pages 139-159, May.
    4. Gupta, Sanjay & Hwang, Yuhchang & Schmidt, Andrew P., 2011. "Structural Change in the Research and Experimentation Tax Credit: Success or Failure?," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(2), pages 285-322, June.
    5. Hines, James R. Jr., 1999. "The Case Against Deferral: A Deferential Reconsideration," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(3), pages 385-404, September.
    6. John Mutti & Harry Grubert, 2009. "The Effect of Taxes on Royalties and the Migration of Intangible Assets Abroad," NBER Chapters, in: International Trade in Services and Intangibles in the Era of Globalization, pages 111-137, National Bureau of Economic Research, Inc.
    7. Mamuneas, Theofanis P. & Ishaq Nadiri, M., 1996. "Public R&D policies and cost behavior of the US manufacturing industries," Journal of Public Economics, Elsevier, vol. 63(1), pages 57-81, December.
    8. Tseng, Kevin, 2022. "Learning from the Joneses: Technology spillover, innovation externality, and stock returns," Journal of Accounting and Economics, Elsevier, vol. 73(2).
    9. Nguyen, Phuong-Anh & Kecskés, Ambrus, 2020. "Do technology spillovers affect the corporate information environment?," Journal of Corporate Finance, Elsevier, vol. 62(C).
    10. Hines, James R. Jr., 1999. "The Case against Deferral: A Deferential Reconsideration," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 385-404, September.
    11. James R. Hines, Jr. & James R. Hines Jr. & R. Glenn Hubbard, 1995. "Taxes, Technology Transfer, and R&D by Multinational Firms," NBER Chapters, in: Taxing Multinational Corporations, pages 51-62, National Bureau of Economic Research, Inc.
    12. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
    13. James R. Hines Jr. & Adam B. Jaffe, 2000. "International Taxation and the Location of Inventive Activity," NBER Chapters, in: International Taxation and Multinational Activity, pages 201-230, National Bureau of Economic Research, Inc.
    14. Huang, Minjie & Kubick, Thomas R. & Tseng, Kevin, 2021. "Technology spillovers and the duration of executive compensation," Journal of Banking & Finance, Elsevier, vol. 131(C).

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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