Tax Policy and Administration:

The Research Tax Credit Has Stimulated Some Additional Research Spending

GGD-89-114: Published: Sep 5, 1989. Publicly Released: Sep 5, 1989.

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Pursuant to a congressional request and a legislative requirement, GAO reviewed the effectiveness, structure, and administration of the research and experimentation tax credit.

GAO found that: (1) the credit stimulated between $1 billion and $2.5 billion in additional research spending between 1981 and 1985 at a cost of $7 billion in tax revenues; (2) although the amount of spending stimulated by the credit was below the credit's revenue cost, the long-term total benefits from research could be much higher; (3) the credit could provide more of an incentive if the moving-average base were replaced with a fixed base indexed to the growth in gross national product or another indexing factor and if the base and index were periodically reviewed and adjusted as needed; (4) the Internal Revenue Service had difficulty administering the credit and questioned the credit claimed by 79 percent of the corporations it audited; (5) many revenue agents reported that the definition of qualified research expenditures was unclear; and (6) in May 1989, the Department of the Treasury proposed regulations to clarify the definition.

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