Function Mechanism of Corporate Tax Incentive on R&D Investment

In the context of infinitely operating firm of no tax, tax, and the plus deduction policy, Using revelation principle, we reveal the economic mechanism of taxation effects on R&D investment, with the source of R&D expenditure divided into internal and external funds. Model analysis shows that the plus deduction policy has a subsidy effect on R&D investment. Specifically, it can boost the R&D investment via decreasing essential profits and financing costs, it has dual effects of common incentives and value guidance. Furthermore, it can improve the corporate governance and reduce information asymmetry which is vital guarantee for external funds. It comes to the conclusion that reducing corporate income tax is an effective method for R&D investment, however, taking R&D expenses as a tax avoidance tool or profit adjusted method need trade off the cost and benefits. This paper contributes to clarifying the mechanism of policy effects, improving the performance of R&D investment and promoting corporate innovation capability.