B. Anthony Billings

The effects of taxes and organizational variables on research and development intensity

Prior research has failed to reach consensus on which variables explain private-sector research and development (R&D) spending. This study extends prior research explaining R&D spending of firms in the US private sector by regressing R&D intensity on a number of tax and organizational variables. COMPUSTAT data from 113 firms in 1994 are used to estimate the effects of the variables on R&D intensity (used interchangeably with R&D activity). Ordinary least square estimates indicate that firms that were eligible for the R&D credit had higher R&D activity than firms that were ineligible. R&D intensity is a decreasing function of both capital intensity and the debt to capital ratio. Neither management stockholding nor diversification strategy meaningfully influenced R&D activity. The reported results have implications regarding US tax policy towards the tax subsidy for R&D. The results also help to clarify prior findings regarding a number of organizational variables on R&D intensity. One implication of these results for US tax policy is that private sector R&D intensity can be meaningfully influenced by the level of tax subsidy.

The role of taxes in corporate research and development spending

This study replicates prior research regarding research and development (R&D) spending by sampling R&D spending for a cross-section of firms in non-service related industries. Compustat data for 231 firms from 1992 to 1998 are used to test whether the US Federal tax credit for R&D meaningfully influenced R&D spending of the sampled firms. Firms’ (1) effective rate of R&D tax credit, (2) rate of decay in R&D capital for firms’ primary industry affiliation, (3) financial cost of capital, and (4) marginal tax rate are used to compute firms’ user-cost of capital for in-house R&D. Results show that firms that were eligible for the tax credit spent more on R&D than non-eligible firms as the user-cost of in-house R&D increased. These results add further evidence regarding the role of the tax credit in stimulating R&D activity and suggest that a tax credit for incremental research can be used to boost private-sector R&D spending.

Taxes and the acquisition of depreciable assets: The Tax Reform Act of 1986 and the alternative minimum tax

Abstract Analysis of firm investment behavior during 1982–1993 shows that the Tax Reform Act of 1986 (TRA 86) Public Law No. 99-514 substantially affects both purchases and leases of depreciable assets. The changes in the regular corporate income tax rules are shown to lower asset acquisition. The effect of the alternative minimum tax (AMT) is found to vary with the debt share in firms’ capital structure and with the frequency of AMT exposure during the life of the assets acquired. On average, TRA86 depresses asset purchases less for firms that are subject to the AMT: AMT somewhat mitigates the negative effects of the regular tax rules.

An analysis of the European community VAT: Implications for U.S. tax policy

Abstract In recent years, several proposals have been introduced to implement a value added tax (VAT) in the United States as well as other forms of consumption-based or flat-taxes. Most proposals are pitched as being fairer, simpler, and more amenable to encouraging personal savings and business investment than the federal income tax. However, consumption taxes such as the VAT have often been criticized for three main reasons. First, consumption taxes such as the VAT, are accused of being money machines in government hands. Second, consumption taxes are said to be regressive. Third, consumption taxes are said to pre-empt the state tax base. Revenue Statistics from the Organisation for Economic Cooperation and Development for nine European Union (EU) countries are used to determine whether the VAT became a “money machine” in the nine EU countries. Results indicate that VATs can be implemented without becoming money machines for the government. EU countries used the VAT to replace a number of indirect taxes and not to increase the overall tax burden. Disparate findings from prior studies are reconciled for the same years studied by prior authors. One possibility for disparate findings may be that prior studies used too few years of data in their analysis.

Inventive Efficiency: How the U.S. Compares with Japan

This study argues that inventive (R&D) efficiency may be an important factor in the competition for global market shares and goods and services. The authors compare R&D efficiency for 14 industrial groups in the United States and Japan using multiple indices of inventive efficiency. Findings show interesting differences in inventive efficiency across industrial groups and between the United States and Japan. United States food, textile, chemical, rubber, metals, fabricated metals, and other miscellaneous manufacturing industries appear to be relatively more efficient in inventive efficiency than their Japanese counterparts. In contrast, Japanese paper, petroleum, machinery, and scientific equipment industries display greater inventive efficiency than their United States counterparts. The electrical equipment, transportation, and stone industries in the two countries appear to be equally efficient. The implications of these differences are discussed.

The Effect of Taxes on the Retirement of Machinery and Equipment

This study extends prior research explaining the role of taxes in investment decisions regarding depreciable business assets. It also assesses whether firms’U.S. alternative minimum tax (AMT) status influenced the level of machinery and equipment retired. The article shows analytically that firms paying the AMT have costs of capital lower than firms paying the regular tax when debt shares (debt-to-asset ratio) in their capital structure were lower than a critical level. Two hypotheses are tested: (a) whether firms that paid the AMT and had debt shares below a critical level retired higher amounts of machinery and equipment than other firms and (b) whether firms that paid the AMT retired lower amounts of machinery and equipment in the period following the modification of the AMT formula in 1989 than in the pre-1990 period. Analysis of COMPUSTAT data froma sample of 95 industrial firms over the 1987-1993period supports both hypotheses.

THE EFFECT OF EXPORT TAX INCENTIVES ON EXPORT VOLUME: THE DISC/FSC EVIDENCE

This article examines the sensitivity of U.S. exports to the availability of export incentives offered under the Domestic International Sales Corporation (DISC) and the Foreign Sales Corporation (FSC) provisions of U.S. tax law. Evidence on the efficacy of export tax incentives is mixed. The history of the DISC/FSC tax incentives provides a natural experiment to address the question of the effect of tax incentives on export volume. We examine the relation of U.S. export volume to the availability of these export tax incentives from 1967 to 1998, controlling for product class and important macroeconomic variables, and find evidence of a positive association between the level of U.S. exports and the existence of the export incentives offered under the DISC/FSC provisions. However, this association depends on product type. Our findings using actual export data are independent of otherwise available data demonstrating a general growth in the use of DISC/FSC entities and the sales volume of these entities. The latter data suffer from an interpretation problem because changes in the number of special export entities used and their sales volume do not necessarily correlate with changes in actual export levels over time. The approach we use in this study is an attempt to overcome this limitation. The reported results have implications for both tax policy regarding the design of export tax incentives and the European Union’s claim that U.S. export tax incentives have damaged U.S. competitors in foreign trade.

The Theory of Marginal Tax Rates for Alternative Minimum Tax Firms

Due to the complexity of the alternative minimum tax (AMT), marginal tax rates (MTR) estimation studies deem AMT firms’ MTRs almost impossible to estimate. We develop an analytical model for estimating AMT firms’ MTRs. The model shows that AMT firms’ MTRs are essentially the opportunity cost of AMT payments: it is a rate of return weighted average of the firm’s effective tax rate and the statutory AMT rate. Retests utilizing AMT MTRs, instead of the traditional MTRs, for AMT firms in two prior empirical studies reveal improved statistical significance of the MTR coefficient. The impact of applying AMT MTR in empirical estimates may depend on the proportion and characteristics of AMT firms in the sample.

The effects of the alternative minimum tax on banks' municipal bond investments

The replacement of the book-income adjustment (BIA) component of the corporate alternative minimum tax (AMT) formula with the adjusted current earnings (ACE) component in 1990 increased the effective tax rate on interest income from municipal bonds and lowered the yield on municipal bonds relative to taxable bonds. This study assesses the effects of the replacement of the BIA with the ACE on municipal bond holdings for a sample of 72 banks over the 1987–1993 period. Results show that banks that were likely to pay the AMT held significantly lower amounts of municipal bonds in the period following the enactment of the ACE adjustment than banks that were likely to pay the regular tax.

Differences in U.S. and Japanese tax policy towards technology

Abstract Current U.S. taxpolicy towards research and development (R&D) is based on the notion that the U.S. is the dominant competitor in the world for technology intensive products. While there is some truth to this view, the fact is that U.S. technological dominance is eroding at a rapid pace. This paper compares U.S. tax policy towards R&D with Japanese tax policy and proposes changes to address U.S. declining market share of technologically intensive products. As compared to Japanese tax laws, U.S. tax laws appear to employ a much more restrictive definition of which costs qualify for the R&D tax credit, impose several limits on the credit formula, and fails to match a number of R&D tax incentives offered under Japanese tax laws. A likely consequence is that U.S. based firms face a lower net present value of R&D projects than Japanese based firms. Among other changes, the paper proposes a reallocation of funds from government sponsored R&D projects to private sector R&D programs through the research and development tax credit.