The Incentive Effects of R&D Tax Credits: An Empirical Examination in an Emerging Economy

47 Pages Posted: 25 Mar 2010

See all articles by Ming-Chin Chen

Ming-Chin Chen

National Chengchi University (NCCU) - Department of Accounting

Sanjay Gupta

Michigan State University - Eli Broad College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 7, 2010

Abstract

This paper investigates whether an increase in the R&D tax credit rate stimulates firms’ incremental R&D spending, and whether firms plan their R&D spending to take advantage of additional tax credits for incremental R&D spending. We find that the increase in the credit rate has a positive effect on the R&D spending of high-tech firms with taxable status, but does not have the same positive effect on non-high tech firms. In magnitude terms, the increased R&D spending for high-tech (non-high tech) firms is about 27% (6.6%), or 16.78% for the overall sample, which translates into credit-induced increase in R&D spending in Taiwan at $4.58 per dollar of revenue forgone. These results indicate that tax incentives alone may not be effective to increase R&D spending if firms do not have profitable innovation opportunities. Further, we find that when the tax incentive is structured as a credit based on incremental R&D spending over a moving-average base, firms opportunistically time their R&D spending patterns to obtain additional tax credits, resulting in greater variability in R&D spending and potentially unintended loss of tax revenues. This study contributes to the ongoing global debate about the efficacy of tax policies towards R&D, especially in emerging economies, by providing first-time firm-level evidence from a large cross-section of Taiwanese firms.

JEL Classification: H25, M41, M47

Suggested Citation

Chen, Ming-Chin and Gupta, Sanjay, The Incentive Effects of R&D Tax Credits: An Empirical Examination in an Emerging Economy (March 7, 2010). Available at SSRN: https://ssrn.com/abstract=1574136 or http://dx.doi.org/10.2139/ssrn.1574136

Ming-Chin Chen

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan, Taipei
Taiwan

Sanjay Gupta (Contact Author)

Michigan State University - Eli Broad College of Business ( email )

632 Bogue Street, 520 BCC
East Lansing, MI 48824
United States
517-432-6488 (Phone)

HOME PAGE: http://www.broad.msu.edu/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
303
Abstract Views
1,992
rank
107,637
PlumX Metrics