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With growing academic and policy interest in research and development (R&D) tax incentives, the question about their effectiveness has become ever more relevant. In the absence of an exogenous policy reform, the simultaneous determination of companies’ tax positions and their R&D spending causes an identification problem in evaluating tax incentives. To overcome this identification challenge, we exploit a U.K. policy reform and use the population of corporation tax records that provide precise information on the amount of firm-level R&D expenditure. Using difference-in-differences and other panel regression approaches, we find a positive and significant impact of tax incentives on R&D spending, and an implied user cost elasticity estimate of around -1.6. This translates to more than a pound in additional private R&D for each pound foregone in corporation tax revenue.

Finance, Public. --- Cameralistics --- Public finance --- Public finances --- Currency question --- Corporate Finance --- Personal Finance -Taxation --- Public Finance --- Taxation --- Business Taxes and Subsidies --- Taxation, Subsidies, and Revenue: General --- Personal Income and Other Nonbusiness Taxes and Subsidies --- Corporate Finance and Governance: General --- National Government Expenditures and Related Policies: General --- Public finance & taxation --- Ownership & organization of enterprises --- Tax incentives --- Tax allowances --- Small and medium enterprises --- Marginal effective tax rate --- Expenditure --- Taxes --- Economic sectors --- Tax policy --- Income tax --- Small business --- Tax administration and procedure --- Expenditures, Public --- United Kingdom