The incentive effects of R&D tax credits: An empirical examination in an emerging economy. Issue 1 (April 2017)

• Record Type: Journal Article
• Authors: Chen, Ming-Chin; Gupta, Sanjay
• Is Part Of: Journal of contemporary accounting & economics. Volume 13:Issue 1(2017:Apr.)
• Page Start: 52
• Page End: 68
• Publication Date: 2017-04
• Subjects: H25 -- H32 -- O31 -- O38; Research and development expenditure -- R&D tax credits -- Tax incentives -- Emerging economy; Accounting -- Periodicals; Accounting -- Research -- Periodicals; Accounting -- Periodicals; Accounting; Accounting -- Research; Periodicals; 657.05
• DOI: 10.1016/j.jcae.2017.01.001
• Languages: English
• ISSNs: 1815-5669

Abstract

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 toward R&D by providing firm-level evidence from a large cross-section of firms in an emerging economy.