R&D Tax Policy during the 1980s: Success or Failure?

R&D tax policy in the United States during the 1980s is evaluated, with particular emphasis placed on quantifying the impact of the R&D tax credit on the R&D investment of manufacturing firms. Using publicly available data on R&D spending at the firm level, I estimate an average tax price elasticity for R&D spending which is in the neighborhood of unity in the short run. Although the effective credit rate is small (less than 5 percent until 1990), this relatively strong price response means that the amount of additional R&D spending thus induced was greater than the cost in foregone tax revenue. The recent evolution of features of the US corporate tax system which affect R&D is also reviewed and my results are compared with those of previous researchers. The conclusion is that the R&D tax credit seems to have had the intended effect, although it took several years for firms to fully adjust. I also argue that although the high correlation over time of R&D spending at the firm level makes it difficult to estimate long run effects precisely, the same high correlation makes it probable that these effects are large.