The Effectiveness of the R&D Tax Credit: Evidence from the Alternative Simplified Credit

Posted: 7 Oct 2014 Last revised: 10 Jun 2015

See all articles by Andrew Finley

Andrew Finley

Claremont McKenna College - Robert Day School of Economics and Finance

Stephen J. Lusch

Texas Christian University - Department of Accounting

Kirsten A. Cook

Texas Tech University - Area of Accounting

Date Written: September 23, 2014

Abstract

We examine the influence of the Alternative Simplified Credit (ASC) on firms’ research and development (R&D) spending. The ASC remedies a perceived flaw with the previous R&D tax credit regime that excluded firms with high R&D intensities during their fixed-base periods and/or high sales in the previous four years from claiming a credit. We document a large increase in R&D tax credit eligibility following the enactment of the ASC and find that its effect on R&D spending was positive relative to firms not utilizing this new credit-calculation option. Specifically, we estimate that the ASC induced an additional $2.26 of R&D spending for every dollar of foregone tax revenue. These results provide evidence that the ASC has spurred R&D investment in a setting where firms have a choice between two credit-calculation methods.

Keywords: tax credits, research and development, tax incentives

JEL Classification: H25, H32, O31

Suggested Citation

Finley, Andrew and Lusch, Stephen J. and Cook, Kirsten A., The Effectiveness of the R&D Tax Credit: Evidence from the Alternative Simplified Credit (September 23, 2014). Journal of American Taxation Association, Vol. 37, Issue 1, pp. 157-182, 2015. Available at SSRN: https://ssrn.com/abstract=2506101

Andrew Finley (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

Stephen J. Lusch

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

Kirsten A. Cook

Texas Tech University - Area of Accounting ( email )

P.O. Box 42101
Lubbock, TX 79409
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
597
PlumX Metrics