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that one dollar of research credit encourages at least one dollar of research spending or provide inconclusive evidence on the mount of research spending stimulated per dollar of research credit. Thus, the recent evidence is mixed.

Most of the available studies evaluate the research credit as it existed prior to its redesign in 1989. There has been little evaluation of the incentive effect of the present design of the credit, although the new credit likely increased the incentives for research per dollar of revenue cost.

A problem with providing tax incentives for research is that they are difficult for tax authorities to administer. Defining qualified research is intrinsically difficult, so that the general definition remains vague and subject to disputes between taxpayers and tax authorities. Existing evidence suggests that in 79% of the cases in which the research tax credit was audited during the first half of the 1980s, the amounts claimed were adjusted downward by nearly 20 percent. A similar incentive for research provided instead through a grant program may be easier to administer, because review and oversight would be provided by persons with specialized knowledge of a particular industry or lines of work.

Question 2: What are the tax benefits for universities and non-profit research institutions and what is the rationale for these provisions?

The United States tax system contains a number of provisions that give favorable tax treatment to non-profit organizations devoted to scientific research. First among these is an income tax exemption. The United States generally taxes the income of corporations. However, a non-profit corporation can be exempt from corporate income tax if most of its activities further certain purposes specified by statute. Organizations that further scientific or educational purposes qualify for an exemption. Thus, institutes dedicated to scientific research and universities that conduct research in addition to training students are generally exempt from the corporate income tax. To retain this exempt status, they may not participate in political campaigns, lobby for legislative changes to any substantial extent, or give a profit interest in their activities to private parties.

Question 3: Is there evidence that the provision of tax benefits for universities and non-profit research institutions leads to economic pay-off?

We are unaware of research on this specific point. However, the presence of significant benefits to society from private research is well established in the literature. The complex and variable nature of these benefits makes them difficult to measure with precision.



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