THE 1990 R-AND-D TAX CREDIT - A UNIFORM TAX ON INPUTS AND A SUBSIDY FOR R-AND-D

Starting in 1990, the base of the R&D tax credit was linked to a movin g average of a firm's sales. The complicated nature of the base has ma de 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 insignifi cant, so that the credit might reasonably be viewed as just a subsidy on R&D expenditures. The analysis also shows that the current system o ffers a greater marginal incentive for R&D than the system that was in place prior to 1990.