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Re-examining the Cost-Effectiveness of the Research and Experimentation Tax Credit

This paper evaluates several well-known empirical studies of the cost-effectiveness of the research and experimentation (R&E) tax credit. Studies of the credit's effect during 1981-85 generally find weak evidence of cost-effectiveness. However, more recent studies focusing on a longer period conclude that the tax credit has induced an increase in R&E spending by an amount that is significantly greater than the foregone tax revenue. The independent analyses in the latter studies appear empirically well founded and their results are robust. Their individual conclusions that the R&E tax credit was cost-effective during the 1980s converge toward the same value—roughly $2.00 of induced R&E spending per dollar of revenue loss.

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