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

Posted: 2 Nov 2016

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: September 30, 2016

Abstract

This paper investigates whether an increase in the R&D tax credit rate stimulates firms’ 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. 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 the unintended loss of tax revenues. This study contributes to the ongoing global debate about the efficacy of tax policies towards R&D by providing firm-level evidence from a large cross-section of firms in an emerging economy.

Keywords: Research and Development Expenditure, R&D Tax Credits, Tax Incentives, Emerging Economy

JEL Classification: H25, H32, O31, O38

Suggested Citation

Chen, Ming-Chin and Gupta, Sanjay, The Incentive Effects of R&D Tax Credits: An Empirical Examination in an Emerging Economy (September 30, 2016). Available at SSRN: https://ssrn.com/abstract=2862491

Ming-Chin Chen (Contact Author)

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

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

Sanjay Gupta

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/

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