THE EFFECT OF AN INVESTMENT TAX CREDIT ON RESEARCH-AND-DEVELOPMENT SPENDING

With calls occurring to the new administration to re-introduce a capital investment tax credit, there is a need to evaluate its prospective effect on R&D expenditures. This paper explores the relationships among long-term trends in non-federal R&D spending, and the external forces of a capital investment tax credit and a research and experimentation tax credit. Other forces over the last three decades which had been identified earlier, such as projected real interest rates, space expenditures, and oil price changes have been controlled for as intervening variables. While concluding that the underlying trend of increase in these expenditures is modestly over one percent, each of the other factors has significantly affected R&D spending: The investment tax credit has lowered R&D expenditure; while the research and experimentation credit has raised it. In the present economic climate and unemployment among engineers, continuation of the research and experimentation tax credit is supported. Equally, support should be rejected for the investment tax credit not only for its negative impact on R&D spending, but also because greater substitution of capital for labor sends the wrong message at a time of high overall unemployment.