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R&D Tax Incentives and Manufacturing
Sector R&D Expenditures
M. ISHAQ NADIRI
New York University
THEOFANIS P. MAMUNEAS
University of Cyprus
INTRODUCTION
An important characteristic of R&D investment distinguishing it from other
types of investment is that its output has the properties of public goods; it can be
considered at least partially nonexcludable and nonrivalrous.i Indeed, the em-
pirical literature provides extensive evidence that not only is the rate of return of
privately funded R&D investment very high compared to that of investment in
physical capital, but more importantly, its social rate of return is several times
higher than its private rate of return.2 This suggests that there are substantial
externalities or spillover effects associated with R&D investment. Therefore,
privately financed R&D is suboptimal, and the direct or indirect support of gov-
ernment is justified.
Theoretically, there are many different ways to deal with market failure asso-
ciated with externalities. For instance, externality-generating activities can be en-
couraged by providing subsidies, by granting producers property rights and charg-
ing differential prices for their use by others, by allowing firms to internalize the
externality, and finally, by having the government engage directly in externality-
generating activity. Indeed, in the postwar period, the U.S. government has pur-
sued a combination of these policies strengthening innovators' property rights
through the patent system; encouraging firms to form joint R&D ventures; di-
rectly investing in R&D through companies, universities, and other nonprofit in
iSee Arrow (1962), Spence (1984), and Romer (1990).
2See, for instance, Griliches (1979, 1991), Cohen and Levin (1989), Mohnen (1990), and Nadiri
(1993).
53
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54
BORDERLINE CASE
stitutions and government laboratories; and lastly, providing tax incentives for
company-financed R&D.
This chapter attempts to evaluate the contributions of R&D tax policies in
particular, the expensing of R&D and the research and experimentation (R&E)
credit first instituted in 1981 in promoting R&D investment in U. S. manufac-
turing industries. Three specific public policy issues are addressed:
1. How much lower would private R&D investment have been if the R&E
credit were abolished and if R&D expenditures were treated as amortiz-
able capital expenditures similar to expenditures on plant and equipment?
. What are the social benefit-cost ratios of these R&D tax policies over the
period of the study?
3. Finally, what appear to be the potential shortcomings of the R&E tax
credit and how might it be made more effective?
To answer these questions, we estimated a cost function, taking into account
the level of output, prices of the traditional inputs such as labor and private capi-
tal, the rental price of company-financed R&D capital, and the capital stocks of
publicly financed R&D.3 Cost and factor demand functions for the private factors
of production including industry-financed R&D capital stock are estimated
jointly.4 In this framework, input demands are interrelated; changes in the price
of one input affect demand for other inputs. For example, changes in tax incen-
tives for physical plant and equipment affect not only the demand for physical
capital but also the decision to invest in R&D activities. Similarly, changes in the
price of industry R&D capital may affect the demand for labor and physical capi-
tal. These cross-price elasticities are important in addition to each factor's price
elasticities in evaluating the effects of public R&D policies.
The model is estimated using a sample of 15 manufacturing industries, which
constitute the manufacturing sector, as reported in Table 3.1. These industries
perform the bulk of R&D in the U.S. economy. Data on the quantities and price
indices of output, labor, physical capital, and intermediate inputs were obtained
from the Bureau of Labor Statistics, and R&D data were obtained from the Na-
tionalScienceFoundation.5 The estimation period covers the years 1956to 1988.
Using the estimates of the model, it is possible to calculate the output and price
elasticities of the demand for various inputs and to measure the effects of govern-
ment R&D tax and incentive policies on the costs and production structure of
U.S. manufacturing industries.
3For specification and estimation of the model, see Mamuneas and Nadiri (1996).
4Two publicly financed R&D capital stocks also enter the cost function as shift variables and thereby
affect demand for labor, capital and private R&D. One type of publicly financed R&D is performed
inside a given industry, the second type is all other publicly financed R&D performed outside the
particular industry. The latter captures potential spillover benefits from government-financed R&D
activities. These publicly financed R&D stocks and the disembodied technical change have nonneutral
effects on the structure of the industry cost and demand for inputs. (See Mamuneas and Nadiri, 1996)
5A description of the data is available upon request.
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R&D TAX INCENTIVES AND MANUFACTURING-SECTOR R&D EXPENDITURES 55
TABLE 3.1 Industry Classification
Code SIC Codes Industry
20 20 Food and kindred products
26 26 Paper and allied products
28 28 Chemicals and allied products
29 29 Petroleum refining and related industries
30 30 Rubber products
32 32 Stone, clay, and glass products
33 33 Primary metals
34 34 Fabricated metal products
35 35 Machinery
36 36 Electrical equipment
37 37 Transportation equipment
38 38 Scientific instruments
40 22, 23 Textiles and apparel
41 24, 25 Lumber, wood products, and furniture
42 21, 27, 31, 39 Other manufacturing industries
EFFECTS OF R&D TAX POLICY ON COST STRUCTURE
Historically, the federal government, recognizing the importance of R&D
investment for economic growth and international competitiveness, has treated
R&D investment more favorably than other kinds of investments. The federal
government basically uses two types of tax policy instruments to stimulate R&D
expenditures. One, in place since 1954, is the immediate deductibility provision
of company-financed R&D expenditures. The second is the direct R&E tax credit
introduced by the Economic Recovery Tax Act of 1981.
The 1981 Tax Act, in addition to introducing the Accelerated Cost Recovery
System for investment in plant and equipment, introduced an incremental R&E
tax credit for qualified research expenditures. Firms were eligible to claim either
25 percent credit if their R&D expenditures exceeded the average of R&D spend-
ing of the three previous years or half of the credit if they were above twice the
base. This credit was initially intended to expire at the end of 1985 but was
renewed at a rate of 20 percent for two additional years in the Tax Reform Act
(TRA) of 1986.6
To estimate the effect of these two R&D tax incentives on the price of R&D,
assume that a firm incurs $1 of R&D expenditures in excess of its R&D expendi-
tures in the past three years. With an incremental tax credit of 25 percent, this
means that the cost to the firm will be reduced by $1 x 0.25 = $0.25. However,
the $1 increase in R&D expenditures decreases the incremental R&E tax credit
for the next three years by $0.33 x 0.25 = $0.083 for each year. Thus, with a
6The credit has from then renewed at a rate of 20 percent. See Hall (1992) for a brief history of the
credit rate, qualified expenditure rules and base levels during 1981-1991.
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56
BORDERLINE CASE
discount rate of 10 percent the net tax reduction of a $1 increase in R&D expen-
ditures is $0.25 - [~;3=~$0.083/~1 + 0.10i] = $0.045, and the actual posttax cost of
the expenditures is $1 - $0.045 = $0.955.
Consider now the effect of the immediate deductibility provision of R&D
expenditures. Suppose that the corporate income tax rate is 46 percent; then the
tax reduction is $0.46, and the after-tax cost of R&D expenditures $1 - $0.46 =
$0.54. By combining these two incentives, the after-tax cost of $1 of R&D ex-
penditures is $1 - $0.46 - $0.045 = $0.495 (i.e., about one-half its pretax cost).
For firms to benefit from tax incentives, they must have sufficient taxable
income. In addition, in the case of incremental R&E tax credit, Eisner et al. (1984)
have estimated that in 1981 and 1982, about 25 and 35 percent, respectively, of
manufacturing firms did not claim the credit either because they did not increase
their R&D expenditures over the base or because they did not have sufficient
federal income tax liabilities. In some instances the incremental character of the
credit might even make the effective rate negative (Eisner et al., 1984; Hall, 1992~.
In the absence of information, we assume that the firms in our sample of indus-
tries have enough tax liabilities and that the increase in their R&D expenditures
was greater than the base but less than twice the base.
Under the above assumptions, let tic be the corporate income tax rate, 5 the
incremental R&E tax credit rate, and ~ a parameter taking values of 1 if there is
immediate expensing of R&D expenditures but values less than 1 otherwise.7
The after-tax cost of R&D expenditures is given by qR(1 - xAc- v;), where qR is
the acquisition price, v = [1 - );3=~ 0.33 /~1 + Hi ~ and r is the discount rated
Let the after-tax rental price of R&D capital services (PR) be defined by the
equality between the posttax cost of acquisition and the present value of future
rentals (Hall and Jorgenson, 1967~. Then the posttax rental price of company-
financed R&D capital is given by
PR qR(r + ~R)~1 -/`UC-vie),
(1)
where r is the discount rate and OR is the depreciation rate of company-financed
R&D capital.9 For a given level of output, the effect of a change in R&D tax
7The parameter can be considered as the rate with which R&D expenditures are allowed to be
deducted in the current period. To see the significance of immediate expensing of R&D expenditures,
compare this with the case in which the government allows only that the economic depreciation of
R&D expenditures be deducted from current income. The present value of the depreciation deduc-
tions of $1 of R&D with a depreciation and discount rate of 10 percent is equal to 0.50 [= 0.10/(0.10
+ 0.10)], and the parameter ~ takes the value 0.50.
The after-tax cost of $1 of R&D expenditures for the period 1981 to 1988 is about $0.55, where the
contributions of immediate expensing and the incremental R&E tax credit are about 0.42 and 0.038,
respectively. For 1981, v = [1-0.5/(1+ r) -~3_2O.33/(1+ r)~] since for 1982 the base was the average
of R&D expenditures of 1980 and 1981 (see Eisner et al., 1984).
9Similar rental prices are constructed in the model for the physical capital by taking account of
various taxes and subsidies that pertain to plant and equipment investment.
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R&D TAX INCENTIVES AND MANUFACTURING-SECTOR R&D EXPENDITURES 57
incentives (T) on the demand for R&D capital stock and on the other inputs in
industry is given by
Hit = ~lNxh /3 lnT = £~hR(lnpR /BlnT), T = 5,Z, j = L,K,R,M, (2)
where £~hR is the price elasticity of input demands with respect to the rental price
of R&D capital and (3lnpR/3lnT) is the elasticity of the rental price of R&D
capital with respect to a change in tax incentives, which is equal to either
~ in PR I ~ in 5 = -v5 /~1 - Tic - V5)
for a change in incremental R&E credit or
~ in PR I ~ in ~ = -arc /~1 - Tic - V5)
for a change in the extent of immediate expensing.
Among the empirical results from the model estimation are the following:
(3)
(4)
1. The pattern of the own-price elasticities of labor, physical capital, and
intermediate inputs varies from one industry to another, whereas the own-
price elasticity of company-financed R&D capital does not vary much
from industry to industry. The own-price elasticity of private R&D capital
ranges from -1 in textile and apparel (40), lumber, wood products and
furniture (41), and other manufacturing (42) to -0.94 in scientific instru-
ments (38~. The company-financed R&D price elasticity estimated in this
study is in the middle range of own-price elasticities of R&D reported in
the literature. Hines (1993) has estimated a price elasticity of company-
financed R&D of about -1.2; Hall (1992), about -1; whereas Nadiri and
Prucha (1989) and Bernstein and Nadiri (1989) have reported a price elas-
ticity of total R&D (company-plus publicly financed) of about -0.4 to
-o.5.io
2. The cross-price elasticities suggest that price changes in other inputs such
as labor, physical capital, and materials have significant effect on R&D
investment. Company-financed R&D capital and physical capital are sub-
stitutes in most industries. It also seems that a change in the price of
Hour estimates are closer to those of Hall and Hines. The difference between our estimates of own-
price elasticity of company-financed R&D and the estimates of Bernstein and Nadiri (1989) and
Nadiri and Prucha (1989) can be explained by the fact that the elasticities estimated by these authors
pertain to total R&D performed in industry (i.e., company-financed as well as publicly financed) and
thus respond less to price changes. However, it very important to note that considerable differences in
price elasticity of R&D investment could still arise due to the differences in the model specification
and estimation methods.
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58
BORDERLINE CASE
company-financed R&D affects physical capital relatively less than a
change in the price of physical capital affects company-financed R&D
capital. This has the very important implication for public policy that tax
measures to promote investment in structures and equipment will have
significant indirect effects on R&D investment.
3. Although company-financed R&D is a substitute for labor, it is a comple-
ment of intermediate inputs in low it&D-intensive industries but a weak
substitute in high-technology industries such as chemicals (28), machin-
ery (35), electrical equipment (36), transportation equipment (37), and
scientific instruments (381.
In short, demand for R&D capital is affected not only by changes in its own
rental prices but also by the price movements of other factors of production such
as labor, physical capital, and materials. Considerable evidence from this and
many other studies shows that factors of production, particularly investment in
physical and R&D capital, respond to changes in after-tax prices. Our results
suggest that increases in the prices of labor and physical capital lead to an in-
crease in private R&D investment. This implies that any input price changes in-
duced by government tax policies, whether payroll taxes, corporate taxes, or tax
credits and incentives for investment in plant and equipment, will have a signifi-
cant indirect effect on R&D investment. Considering R&D tax and subsidy poli-
cies in isolation from other taxes and incentives that a firm or industry faces may
lead to incorrect measurement of the effects of government policies to promote
R&D expenditures. Therefore, it is essential that all taxes that are levied on a firm
or industry be considered together to evaluate properly the effectiveness of any
R&D tax policies.
We estimated the elasticities of cost, labor, physical capital, R&D capital,
and intermediate inputs with respect to incremental R&E tax credit and the rate of
R&D expensing. These elasticities have been constructed by multiplying the in-
put price elasticities by the percentage change of rental R&D price due to a change
in R&D tax incentives. The evidence suggests that a change in the rate of ex-
pensing has a much greater effect by far, almost 10 times, than a change in incre-
mental R&E tax credit. This occurs because the immediate expensing of R&D
expenditures constitutes 90 to 96 percent of the reduction of the cost of R&D
expenditures whereas the incremental R&E tax credit is responsible for only a
small fraction of the price reduction. The effect of the incremental R&E tax credit
is nevertheless significant. Both effects are relatively larger in the low R&D
iiCordes (1984), for instance, has argued that the ARCS, introduced in 1981 for plant and equip-
ment investment, has moved the price of physical capital relative to R&D capital in favor of the
former. Thus, the introduction of an incremental R&E tax credit was necessary to restore in some
measure incentives for R&D investment.
i2The elasticity of cost with respect of tax incentives is given by t7cT=3lnCh/3lnT
SR(31nPR /31nT).
=
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R&D TAX INCENTIVES AND MANUFACTURING-SECTOR R&D EXPENDITURES 59
intensive industries than in high-technology industries, reflecting the fact that
industries with a long tradition of R&D investment respond less to the cost changes
of R&D investment. This is consistent with the evidence from the tax forms of
1981, 1982 and 1983 (see Cordes (1988, 1989) showing that after the introduc-
tion of R&E tax credit, the high-technology manufacturing industries reported
smaller increases in R&D expenditures than other manufacturing industries.
Based on the model estimates, the incremental R&E tax credit generated, on
average, about $2.5 billion dollars of additional R&D expenditures per year in the
manufacturing sector during 1981-1988. If it is adjusted with the eligibility ratio
of about 0.63 (see Eisner et al., 1984), the R&E credit has stimulated about $1.6
billion dollars of additional R&D expenditures per year.~3 This estimate is con-
sistent with those reported by Baily and Lawrence (1992), Hall (1992), and Hines
(1993), although it may be biased upward because there is evidence that many
firms redefined activities as R&D after the introduction of the R&E credit.
Suppose that the government, instead of allowing the immediate deductibil-
ity of R&D investment, allows only the economic depreciation of R&D expendi-
tures to be deducted from current income. With a discount rate and depreciation
rate of 10 percent (see footnote 6), this implies that the value of the parameter his
0.5 and will account for, on average, about 35 percent decline in R&D expendi-
tures, or about $16 billion per year for the manufacturing sector as a whole. Dis-
allowing immediate deductibility of R&D expenditures would have much greater
negative impact on R&D expenditures than abolishing the R&E tax credit. Pro-
duction costs would rise by $14.3 billion as a result of the removal of 100 percent
deductibility and by $2.6 billion as a result of abolishing tax credit. Industry-
financed R&D would be reduced by similar magnitudes, $13.7 billion and $2.5
billion, respectively, with greatest impact falling on it&D-intensive industries
(28,35, 36, 37, and 38~. The combined contribution of the tax credit and imme-
diate deductibility of R&D expenditures is about $18 billion per year of addi-
tional R&D expenditures. This amounts to approximately 40 percent of the total
privately financed R&D of the entire manufacturing sector. Moreover, if one
takes into account the fact that government directly finances about 30 percent of
total R&D performed in the manufacturing sector, the role of the federal govern-
ment in support of R&D is quite clear.
EFFECTIVENESS OF R&D TAX POLICY
One way to evaluate the effectiveness of R&D tax policies is to measure the
additional private R&D expenditures generated by the tax policies relative to
forgone tax revenues. There is some disagreement among economists about the
i3Cordes (1989) has estimated that the credit stimulated about $560 million to $1.5 billion, whereas
Hall (1992) has estimated that the additional spending stimulated is about $2 billion 1982 dollars per
year.
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60
BORDERLINE CASE
effectiveness of R&E tax credit. For instance, Mansfield (1984, 1986) has esti-
mated that the additional R&D expenditure per dollar cost to the government
ranges between 0.3 and 0.4. Baily and Lawrence (1992) have estimated it to be
about 1 to 1.3. About the same estimates as gaily's are provided by Hines (1993),
whereas Hall (1992) estimates that the ratio is about 2. These differences in esti-
mates are basically due to the differences in price elasticities of R&D estimated
by the authors.
Our estimate suggests, on average, a benefit-cost ratio of R&E tax credit of
about 0.95 for the period 1981 to 1988 for industries included in the sample. If
this ratio is compared with the findings reported by other studies, our estimate is
in the middle range. From our analysis, we can conclude that the R&E tax credit
has not been a failure as the early literature on the subject had suggested, but
rather that it has had a modest impact in stimulating private R&D investment.
Moreover, if one takes into account the induced output effect from increases in
industry R&D expenditures, as well as the spillovers from such investments, then
the benefit-cost ratio of the incremental R&E credit will be higher.~4
Table 3.2 reports the results of the following experiment. Assume that for
the year 1988 the government abolishes the incremental R&E tax credit and al-
lows only the economic depreciation of R&D expenditures to be deducted from
the current income. With these assumptions, our estimates imply that the addi-
tional cost for the industry of the revenues saved by the government would be
about $16.9 billion, but the reduction of R&D tax incentives in turn increases the
rental price of company-financed R&D, leading to a reduction of $16.2 billion in
private R&D investment.
The cost increases and reductions in R&D investment are not uniform across
industries. In fact, in it&D-intensive industries, costs will rise as a consequence
of the change in public R&D policy. However, the cost increases and reduction in
R&D investment in response to the hypothesized changes in R&D tax policies
are very large in it&D-intensive industries such as chemicals (28), machinery
(35), electrical equipment (36), and transportation equipment (37~. Low-technol-
ogy industries, such as food and kindred products (20) and other manufacturers
(42), would not be affected as much. This, of course, is not surprising because in
the low-technology industries, R&D cost shares are very small; thus, removal of
the subsidies has a relatively smaller effect on their cost.
The results reported in the two previous sections are based on the pre-1988
structure of the R&E credit. However, a recent extension of the analysis to the
post-1988 period suggests that these observations also hold for the year 1992.
The magnitudes of the effects vary over time and across industries, but the gen-
eral policy conclusions remain the same.
i4For the empirical literature that supports this hypothesis, see Nadiri (1993).
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R&D TAX INCENTIVES AND MANUFACTURING-SECTOR R&D EXPENDITURES 61
TABLE 3.2 Effect of R&D Tax Incentives on Production Cost and Demand for
Private R&D in Manufacturing Industries in 1988 (in billions of current dollars)
Zero R&E Tax Credit 10% R&D Depreciation Effect of Removing R&D
(from 20%) (A) Rate (from 100%) (B) Tax Incentives (A) + (B)
Industry
Code Cost R&D Capital Cost R&D Capital Cost R&D Capital
20 0.05 -0.05 0.26 -0.26 0.31 -0.30
26 0.03 -0.03 0.19 -0.18 0.22 -0.22
28 0.42 -0.40 2.32 -2.22 2.74 -2.62
29 0.11 -0.11 0.60 -0.59 0.71 -0.70
30 0.04 -0.04 0.22 -0.21 0.26 -0.25
32 0.04 -0.04 0.21 -0.21 0.25 -0.25
33 0.05 -0.04 0.25 -0.24 0.29 -0.29
34 0.04 -0.04 0.22 -0.22 0.26 -0.26
35 0.47 -0.45 2.59 -2.49 3.06 -2.94
36 0.47 -0.45 2.62 -2.47 3.10 -2.92
37 0.61 -0.59 3.38 -3.25 4.00 -3.83
38 0.21 -0.20 1.16 -1.09 1.37 -1.28
40 0.03 -0.03 0.18 -0.18 0.21 -0.21
41 0.01 -0.01 0.06 -0.06 0.07 -0.07
42 0.01 -0.01 0.05 -0.05 0.06 -0.06
Total 2.6 -2.5 14.3 -13.7 16.9 -16.2
R&E CREDIT: POSSIBLE IMPROVEMENTS
The extensive literature evaluating the effectiveness of R&E creditl5 is be-
yond the scope of this chapter to survey. I can outline, however, a few criticisms
and the benefits of potential improvements in the effectiveness of this fiscal in-
strument.
The current R&E credit is not targeted sufficiently to be very effective. For
example, different types of R&D with different types of productivity and social
rates of return may require a more flexible approach. In addition, the tax credits it
is often claimed, accrue mainly to large firms in a few industries. Some of these,
for example, defense contractors, are also major recipients of public R&D expen-
ditures. A more flexible and targeted tax would be less vulnerable to these criti-
cisms. For example, the credit could be focused to promote basic research and
encourage university-industry cooperation in fields of research and development.
The mechanics of qualifying an R&D project, establishing the base year, and
i5See Hall (1992, 1995) for an extensive review of the history, methodological issues, and regula-
tions pertaining to the R&E tax credit in the United States and other Organization for Economic
Cooperation and Development (OECD) countries. Also see Office of Technology Assessment (1996)
and OECD (1996).
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62
BORDERLINE CASE
classifying R&D expenses are not trivial challenges. An effort to simplify and
tighten the existing rules is a worthwhile undertaking.
The on-again, off-again history of the R&E credit has contributed to great
uncertainty on the part of firms and may have undermined the stimulus to R&D
investment. Because of these and other problems associated with the law, admin-
istrative costs entailed with the R&E credit are highly The benefits of R&E
credit would be significantly greater if it were permanent.
There is a need for R&D tax policies to promote not only new investment in
knowledge creation but also dissemination of existing knowledge and findings
among enterprises and industries. Small businesses, public-sector organizations,
and traditionally low it&D-intensive sectors would benefit from a well-targeted
technology diffusion policy.
There are two fundamental problems, one theoretical and the other practical,
in evaluating the results of the econometric evidence and other methods to ascer-
tain the effectiveness of the R&E tax credit:
1. The theoretical issue arises from the fact that firms may undertake R&D
investment in part for strategic and competitive reasons. To that extent,
they are likely to invest in R&D regardless of R&D tax treatment, al-
though they will certainly have a financial interest in claiming the tax
credit.
2. The measurement problem is related to the unsatisfactory state of the R&D
price deflator used in various studies. There has been some effort to im-
prove the quality of these deflators at both the aggregate and the firm
levels, but the results are not satisfactory.
CONCLUSION
We have examined the effects of R&D tax policy on the cost structure of the
manufacturing industries. It is important to recognize that it&D-specific tax mea-
sures are just part of a much larger set of taxes and governmental, fiscal policies
that firms face at a given period. Firms rearrange their demand for various inputs
to minimize their costs, taking into account the entire set of taxes that they may
face. Firms' demands for inputs, particularly investments in physical and R&D
capital, respond to changes in their own rental prices as well as to the price
changes of other inputs. The cross-price effects can be large and significant. For
example, in our study, an increase in the rental price of physical capital or the
price of labor induces firms to invest more in R&D.
The existing R&E tax credit has been at best a modest success. The evidence
on its cost-effectiveness is not as weak as to warrant abolishing it all together.~7
i6See Hall (1995) for further discussion.
i7See Mansfield (1986).
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R&D TAX INCENTIVES AND MANUFACTURING-SECTOR R&D EXPENDITURES 63
The immediate deductibility of R&D expenditures is by far the more important
subsidy. If the government switched treating R&D expenditures like tangible
investments, there would be a substantial reduction of privately financed R&D
investment. As shown elsewhere, it seems that publicly financed R&D invest-
ment is a more appropriate tool for increasing efficiency and possibly for stimu-
lating output growth, whereas R&D tax policy is a more appropriate tool for
stimulating pnvate-sector R&D investment. Using data for 1957-1992, our re-
cent analysis suggests that the results reported here also hold for the years imme-
diately following 1988.
Both instruments, subsidies and direct financing of publicly financed R&D
expenditures, are important means of sustaining balanced output and productivity
growth in the manufacturing sector, but current R&D tax policy should be reex-
am~ned to increase its effectiveness in promoting private investment in techno-
logical innovation diffusion.
ACKNOWLEDGMENT
The support from C.V. Starr Center for Applied Economics of New York
University is gratefully acknowledged. I would also like to thank SeongJun Kim
and Frances Hui for their help.
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Baily,M.N.,andR.Z.Lawrence. 1992. TaxIncentivesfor it&D: What Do the Data TellUs? Study
commissioned by the Council on Research and Technology, Washington, D.C.
Bernstein, J. 1986. Research and Development, Tax Incentives and the Structure of Production and
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Bernstein, J., and M.I. Nadiri. 1989. "Rates of return on physical and R&D capital and structure of
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Modeling, B. Raj, ed. Dordrecht: the Netherlands: Kluwer.
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Representative terms from entire chapter:
tax incentives
