University of Oxford, Centre for Business Taxation
Today, many countries such as the US, UK, France, China and Korea provide generous tax incentives for research and development (R&D) to innovative firms. These incentives can be in the form of tax credits, tax deductions, cash refunds for companies without taxable profit, or other favourable means of treating expenditure on R&D that falls within a certain definition. Against the backdrop of the recent global trend towards implementing generous tax incentive schemes, this paper reviews the economic literature on evaluating the effectiveness of tax policy for R&D.
Policy designs for R&D tax incentives differ across countries and over time. Broadly, the studies find a positive effect of R&D tax incentives on firm level and aggregate R&D spending for firms which are already engaged in such activity in a given jurisdiction. Estimates of the magnitude of the increase in R&D spending in response to a 10 percent reduction in the user cost of R&D usually range between 4 percent and 30 percent. The differences arise from country-specific aspects of each policy design and implementation, as well as firm characteristics such as size and age. There are statistical and data-related challenges related to evaluating the effects of policies on firm location and productivity.