The New Incremental Tax Credit for R&d: Incentive or Disincentive?

The new incremental tax credit for R&D has a limited potential for stimulating expenditures, and in some cases actually discourages them. The credit is pro-cyclical and sensitive to inflation. An initial surge in credit claims arises from shifts in the proportions of R& D deemed qualified rather than increases in total R&D. From 1983 to 1985 the credit is likely to cost over $1 billion annually, exceeding initial Treasury estimates. A number of modifications to the credit would increase its incentive effects; the most important of these would redesign the firmspecific, moving-average base so that increases in current expenditures would not reduce future credits.