How Much Do R&D Tax Credits Affect R&D Expenditures? Japanese tax credit reform in 2003

Author Name KASAHARA Hiroyuki  (University of British Columbia) /SHIMOTSU Katsumi  (Hitotsubashi University) /SUZUKI Michio  (University of Tokyo)
Creation Date/NO. November 2011 11-E-072
Research Project Evaluation of Corporate Tax
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How much do tax credits affect firms' R&D activities? What are the mechanisms? Few empirical studies directly examine the effect of tax credit policies on firms' R&D investments and the importance of financial constraints on the policy effects on R&D. This paper examines the effect of the Japanese tax credit reform in 2003 on firms' R&D investments by exploiting cross-firm variation in the changes in the effective tax credit rate between 2002 and 2003. Regression results suggest a significantly positive effect of the change in the effective tax credit rate on corporate R&D investments. Across different specifications, the estimated (semi-) elasticity of R&D investments with respect to the effective tax credit rate is 2.3 with an approximate standard error of 0.6. We also examine the policy implications of financial constraints on R&D investments and find that the effect of tax credits is significantly larger for firms with relatively large outstanding debt.