Dr. Nirupama Rao has released a brief on policy implications of the R&D tax credit including recommendations and additional areas for review. Dr. Rao is a visiting Assistant Professor of Business Economics and Public Policy at the Wharton School of the University of Pennsylvania and Assistant Professor of Economics and Public Policy at NYU’s Wagner School of Public Service. The report overall found that R&D expenditures are highly sensitive to the tax subsidy rate. 

Put another way, companies really do spend more on technological innovation and process improvement when the R&D credit is available. The amount of additional spending is difficult to pinpoint, particularly with the credit?s on-again, off-again history. Businesses in fiscal year 2012 claimed a total of $11.1 billion in federal R&D credits to offset research and development funding, according to the brief. 

Businesses that claim the credit reduce their after-tax price of R&D. The report states, ?The R&D credit rewards ?rms that increase their research spending with a tax credit worth up to 20 percent of their expenditures above a determined, firm-specific base amount.? Although large corporations claim more of the credit, informed small to mid-size companies benefit from the credit as well. 

The brief and Dr. Rao?s review of other research finds general consensus among scholars that the tax credit increases qualified R&D investment made by companies. Even temporary R&D tax credits spur research spending. Given more certainty in the tax code, businesses could time their research spending to maximize their R&D tax credits for greater investment in innovation.

You?ve read the summary. Now read the brief.