Working Paper: NBER ID: w20615
Authors: Ajay Agrawal; Carlos Rosell; Timothy S. Simcoe
Abstract: In 2004, Canada changed the eligibility rules for its Scientific Research and Experimental Development (SRED) tax credit, which provides tax incentives for R&D conducted by small private firms. Difference in difference estimates show a seventeen percent increase in total R&D among eligible firms. The impact was larger for firms that took the tax credits as refunds because they had no current tax liability. Contract R&D expenditures were more elastic than the R&D wage bill. The response was also greater for firms that invested in R&D capital before the policy change.
Keywords: Research; Development; Tax Credits
JEL Codes: H25; O25; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Change in eligibility rules for the SR&ED tax credit (O35) | Increase in total R&D expenditures among eligible firms (O39) |
| Change in eligibility rules for the SR&ED tax credit (O35) | Increase in contract R&D expenditures (O32) |
| Change in eligibility rules for the SR&ED tax credit (O35) | Increase in R&D spending for firms that previously invested in R&D capital (O39) |
| Refundable nature of the SR&ED tax credit (H23) | Increase in after-tax marginal cost of R&D for firms with zero tax liability (H32) |
| Prior-year taxable income between CAD 200,000 and CAD 500,000 (N22) | Eligibility for refundable 35% R&D tax credit (O32) |
| Pre-policy relationship between prior-year taxable income and R&D expenditures (O32) | Parallel trends assumption (C22) |