The Effect of Refundable R&D Tax Credits on R&D Conducted by Small and Medium Businesses

This paper examines the economic effect of refundable tax credits on R&D expenditure and patent filings using the introduction of the Australian Research and Development Tax Incentive (R&DTI). We exploit the expansion of eligibility for refundable tax credits following the introduction of the R&DTI to specifically identify the extent to which the targeting of tax credits to SMEs was enhanced by altering the credits to make them refundable. Using a difference-in-difference method, we show that an increase in credit-induced research activity, measured by both research expenditures and patent filings, following introduction of the R&DTI is primarily attributable to the widening of refundable credit eligibility. These results suggest that measures addressing cash liquidity are necessary to effectively target tax credits to SMEs and should be considered by policymakers alongside measures that address the marginal cost of R&D