Do Tax Incentives for Research Increase Firm Innovation? An Rd Design for R&D
75 Pages Posted: 18 Jul 2016 Last revised: 26 Jul 2016
Date Written: July 2016
We present evidence of a causal impact of research and development (R&D) tax incentives on innovation. We exploit a change in the asset-based size thresholds for eligibility for R&D tax subsidies and implement a Regression Discontinuity Design using administrative tax data on the population of UK firms. There are statistically and economically significant effects of the tax change on both R&D and patenting (even when quality-adjusted). R&D tax price elasticities are large at about 2.6, probably because the treated group is from a sub-population of smaller firms and subject to financial constraints. There does not appear to be pre-policy manipulation of assets around the thresholds that could undermine our design. Over the 2006-11 period aggregate business R&D would be around 10% lower in the absence of the tax relief scheme. We also show that the R&D generated by the tax policy creates positive spillovers on the innovations of techno-logically related firms.
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