Respect your elders: evidence from Ireland's R&D tax credit reform

This paper evaluates the effect of tax incentives for research and development (R&D) on R&D spending in a quasi-experimental setting. To do this, we exploit an exogenous reform in Irish R&D tax policy, which made the... [ view full abstract ]

This paper evaluates the effect of tax incentives for research and development (R&D) on R&D spending in a quasi-experimental setting. To do this, we exploit an exogenous reform in Irish R&D tax policy, which made the corporation tax credit for R&D refundable. We use the Irish Revenue Commissioners’ tax return data for corporations which contains all key explanatory variables. We find that R&D tax incentives help to increase R&D spending at the company level; however, the additional R&D generated through the tax relief can be attributed entirely to an increase in R&D by older firms, rather than younger firms. The latter result challenges a common narrative on the role of R&D tax incentives for young firms, suggesting that their barriers are not necessarily financial and that age-targeted tax incentives can carry large deadweight.