The 1990 R&D tax credit: A uniform tax on inputs and a subsidy for R&D

Starting in 1990, the base of the R&D tax credit was linked to a moving average of a firm's sales. The complicated nature of the base has made it difficult to identify the incentive effects of the credit. This analysis shows that the current system is equivalent to a uniform tax on all inputs in combination with a subsidy on R&D expenditures. Given current tax code parameters, the level of input taxation is insignificant, so that the credit might reasonably be viewed as just a subsidy on R&D expenditures. The analysis also shows that the current system offers a greater marginal incentive for R&D than the system that was in place prior to 1990.