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R&D Tax Policy During the 1980s: Success or Failure?

In: Tax Policy and the Economy, Volume 7

  • Bronwyn H. Hall

R&D; tax policy in the United States during the 1980s is evaluated, with particular emphasis placed on quantifying the impact of the R&D; tax credit on the R&D; investment of manufacturing firms. Using publicly available data on R&D; spending at the firm level, I estimate an average tax price elasticity for R&D; spending which is in the neighborhood of unity in the short run. Although the effective credit rate is small (less than five percent until 1990), this relatively strong price response means that the amount of additional R&D; spending thus induced was greater than the cost in foregone tax revenue. The recent evolution of features of the U.S. corporate tax system which affect R&D; is also reviewed and my results are compared with those of previous researchers. The conclusion is that the R&D; tax credit seems to have had the intended effect, although it took several years for firms to fully adjust. I also argue that although the high correlation over time of R&D; spending at the firm level makes it difficult to estimate long-run effects precisely, the same high correlation makes it probable that these effects are large.

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This chapter was published in:
  • James M. Poterba, 1993. "Tax Policy and the Economy, Volume 7," NBER Books, National Bureau of Economic Research, Inc, number pote93-1, September.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10876.
    Handle: RePEc:nbr:nberch:10876
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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    1. Partha Dasgupta & Joseph Stiglitz, 1980. "Uncertainty, Industrial Structure, and the Speed of R&D," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 1-28, Spring.
    2. Bernstein, Jeffrey I. & Nadiri, M. Ishaq, 1982. "Financing and Investment in Plant and Equipment and Research and Development," Working Papers 82-27, C.V. Starr Center for Applied Economics, New York University.
    3. Don Fullerton & Andrew B. Lyon, 1988. "Tax Neutrality and Intangible Capital," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 63-88 National Bureau of Economic Research, Inc.
    4. Zvi Griliches, 1998. "Issues in Assessing the Contribution of Research and Development to Productivity Growth," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 17-45 National Bureau of Economic Research, Inc.
    5. Roberts, Russell D, 1987. "Financing Public Goods," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 420-37, April.
    6. Ariel Pakes & Mark Schankerman, 1984. "The Rate of Obsolescence of Patents, Research Gestation Lags, and the Private Rate of Return to Research Resources," NBER Chapters, in: R&D, Patents, and Productivity, pages 73-88 National Bureau of Economic Research, Inc.
    7. 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.
    8. Bronwyn H. Hall, 1990. "The Manufacturing Sector Master File: 1959-1987," NBER Working Papers 3366, National Bureau of Economic Research, Inc.
    9. Auerbach, Alan J., 1984. "Taxes, firm financial policy and the cost of capital: An empirical analysis," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 27-57.
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