The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
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.