Some tests of the incentive effects of the research and experimentation tax credit

Abstract

The effectiveness of the tax credit for research and experimentation (R&E) expenditures is examined using a panel of firm data for the period 1975 through 1988. Using a structural model, the results generally indicate that the credit resulted in increased R&E spending. However, the effect of the credit was substantially mitigated by the impacts of net operating loss carryovers and low growth opportunities. Results also indicate some degree of decreased R&E spending as a result of debt restructuring activity. Tax policy implications are discussed.