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

The Consumer Federation of America (CFA) and the National Credit Reporting Association (NCRA) designed the details of this study with advice from legal counsel to ensure the methodology would comply with the requirements of the Fair Credit Reporting Act, Gramm Leach Bliley Act, and other consumer privacy laws. From the outset, each organization was mindful of the ethical spirit and intent of these consumer protection and privacy laws. In this day of rampant identification theft, we carefully evaluated each segment of the study workflow to ensure that we analyzed data extracted from the credit files without any trace. | RIETI Discussion Paper Series 11-E-072 How Much Do R D Tax Credits Affect R D Expenditures Japanese tax credit reform in 2003 KASAHARA Hiroyuki University of British Columbia SHIMOTSU Katsumi Hitotsubashi University SUZUKI Michio University of Tokyo The Research Institute of Economy Trade and Industry http www.rieti.go.jp en RIETI Discussion Paper Series 11-E-072 November 2011 How Much Do R D Tax Credits Affect R D Expenditures Japanese tax credit reform in 2003 KASAHARA Hiroyuki Department of Economics University of British Columbia SHIMOTSU Katsumi Department of Economics Hitotsubashi University SUZUKI Michio Department of Economics the University of Tokyo Abstract 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. Key words R D tax credits financial constraint Japan. JEL classification D22 H25 H32 K34 O31 O38 RIETI Discussion Papers Series aims at widely disseminating research results in the form of professional papers thereby stimulating lively discussion. The views expressed in the papers are solely those of the author s and do not represent those of the Research .