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

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  • Irem Guceri

    () (Oxford University Centre for Business Taxation)

Abstract

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.

Suggested Citation

  • Irem Guceri, 2018. "Will the real R&D employees please stand up? Effects of tax breaks on firm-level outcomes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(1), pages 1-63, February.
  • Handle: RePEc:kap:itaxpf:v:25:y:2018:i:1:d:10.1007_s10797-017-9438-3
    DOI: 10.1007/s10797-017-9438-3
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    References listed on IDEAS

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    More about this item

    Keywords

    R&D; Tax credits; Quasi-experiment; Difference-in-differences;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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