An important disadvantage of incremental tax credits to encourage industrial research and development is that they
A) are difficult to administer, requiring more government control and intervention.
B) disproportionately penalize those firms that do little research and development.
C) apply only to defense-related research and development.
D) reward firms for doing research and development they would have done anyway.
E) raise the after-tax cost of applied research and development, discouraging new technology.

Question

Quizplus · Accepted Answer

Incremental tax credits may not provide enough incentive for firms to increase their research and development efforts beyond what they would have done anyway. Therefore, these firms receive tax benefits for activities that they would have undertaken regardless of the credit, which can be seen as a reward for minimal effort.

An Important Disadvantage of Incremental Tax Credits to Encourage Industrial