The additionality of R&D tax policy in Australia

Previous statistical analysis has failed to confirm that investment in research and development (R&D) by Australian firms is responsive to tax subsidies, which is in contrast with international evidence. It is notoriously difficult to find a control group in order to estimate the impact of R&D tax incentives because they are entitlement schemes; factors that determine benefits also influence their R&D investment decisions. In this paper, we exploit newly available firm level data to undertake a difference-in-difference analysis around the policy reform in 2012. The results suggest that Australian firms spend approximately an additional $1.90 on R&D for every dollar of tax revenue foregone due to the policy.