The Effectiveness of the R&D Tax Credit: Evidence from the Alternative Simplified Credit

Abstract

ABSTRACT We examine the influence of the Alternative Simplified Credit (ASC) on firms' research and development (R&D) spending. The ASC remedies a perceived flaw with the previous R&D tax credit regime that excluded firms with high R&D intensities during their fixed-base periods and/or high sales in the previous four years from claiming a credit. We document a large increase in R&D tax credit eligibility following the enactment of the ASC, and find that its effect on R&D spending was positive relative to firms not utilizing this new credit-calculation option. Specifically, we estimate that the ASC induced an additional $2.26 of R&D spending for every dollar of forgone tax revenue. These results provide evidence that the ASC has spurred R&D investment in a setting where firms have a choice between two credit-calculation methods. JEL Classifications: H25, H32, O31