Respect Your Elders: Evidence from Ireland’s R&D Tax Credit Reform

Abstract

This paper exploits a unique reform in Irish corporation tax policy to evaluate the effect of tax incentives on research and development (R&D) investment. Using administrative panel data from the Revenue Commissioners, we establish for the first time the additional R&D investment that arises from the provision of the tax credit and we examine the associated firm characteristics. We find that the tax incentive helped to increase R&D investment by firms; however, the estimated effect is driven by older firms rather than younger firms. The latter result challenges a common narrative on the role of R&D tax incentives which increase cashflow for young firms: it suggests that their barriers to innovation may not necessarily be financial, and that age-targeted tax incentives could carry large deadweight.