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The research objective of this article is to examine the Economic Recovery Tax Act of 1981 (ERTA) on innovative efficiency, which measures how effectively firms convert research spending and existing human capital into new patents and products. Research method- wise, this study measures innovative efficiency by dividing the number of new patents to average R&D expenses and analyses how innovative efficiency changed after the ERTA using regression. The main conclusion is that the ERTA tax credit decreased innovative efficiency and competitions for research resources could explain this reduction. These findings provide new insights on the effectiveness of R&D tax policies from the efficiency perspective. Policy makers should consider these findings when designing R&D tax policies in the future.