What Makes R&D Tax Credits Work: Evidence on Compliance Cost and Policy Interactions

• Applicant: Professor Dr. Maximilian Todtenhaupt
• Subject Area: Economic Policy, Applied Economics
• Term: since 2025
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 567015425

Governments worldwide recognize the link between economic growth and corporate R&D, leading to widespread implementation of R&D tax incentives. Among them, R&D tax credits are the most common. However, their impact on corporate R&D activity has been modest. While some evidence suggests marginal effects, overall corporate R&D expenditure has increased only slightly. This discrepancy suggests that the effectiveness of R&D tax credits depends on their design and the broader policy environment. This research project combines data from Germany and Norway to investigate two key success factors for corporate R&D tax credits for which we currently lack empirical evidence: compliance costs and the interaction with other R&D policy instruments. Compliance costs—defined as the sum of all cost a firm incurs if it applies for an R&D tax credit—are important because they affect take-up rates for tax incentives. Overall take-up of these incentives appears suboptimal. Despite their relevance for take up rates, there is scant empirical evidence about the extent and driving factors of compliance cost for R&D tax incentives. More generally, little is known about the magnitude of corporate tax compliance cost. To fill this gap, the proposed project uses a novel comprehensive approach to measure compliance cost for R&D tax credits and identify the factors that determine the magnitude of these compliance costs from granular data on corporate R&D activity of German firms. With respect to the interaction of R&D tax credits with other policies, a first-order concern is the interaction with public R&D activity through government funding to public institutions such as universities or public research institutes. While there is evidence on local spillovers from public research funding to private sector R&D, little is known about the impact of this type of funding in the context of R&D tax credits and vice versa. This project aims at closing this gap by studying a unique setting in Norway with sufficient information on both public research funding and R&D tax credits as well as granular administrative data on corporate R&D expenditure. Another important yet understudied policy interaction arises from the dramatic spread of so-called intellectual property (IP) box regimes which reduce taxes on profits from IP. In contrast to R&D tax credits, IP boxes are output-related in the sense that only successful R&D output is subsidized. Little is known about how they interact with input-related tax incentives such as R&D tax credits. The proposed project sheds light on these issues using administrative data on both R&D activity and foreign affiliates of Norwegian firms.

• DFG Programme: Research Grants
• International Connection: Norway, United Kingdom
• Cooperation Partners: Professorin Irem Güçeri, Ph.D.; Professor Jarle Møen, Ph.D.