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A Framework for Evaluating Provincial R&D Tax Subsidies

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  • Bev Dahlby

Abstract

The spillover effects from a firm's research and development (R&D) activities provide a rationale for R&D tax incentives. This paper provides a framework for incorporating the external rate of return on R&D, the tax sensitivity of R&D spending, and the government's marginal cost of public funds in the evaluation of provincial R&D incentive programs. Using this framework, we find that an additional dollar of tax incentive has to generate close to $2.00 of additional R&D and the external rate of return has to be very close to 30 percent in order to justify a provincial tax subsidy for R&D if the provincial government's marginal cost of funds is $1.40.

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Bibliographic Info

Article provided by University of Toronto Press in its journal Canadian Public Policy.

Volume (Year): 31 (2005)
Issue (Month): 1 (March)
Pages: 45-58
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Handle: RePEc:cpp:issued:v:31:y:2005:i:1:p:45-58

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  1. Mansfield, Edwin, et al, 1977. "Social and Private Rates of Return from Industrial Innovations," The Quarterly Journal of Economics, MIT Press, vol. 91(2), pages 221-40, May.
  2. Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May.
  3. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
  4. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
  5. Benjamin Russo, 2004. "A cost-benefit analysis of R&D tax incentives," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 313-335, May.
  6. Jeffrey I. Bernstein, 1986. "The Effect of Direct and Indirect Tax Incentives on Canadian Industrial R&D Expenditures," Canadian Public Policy, University of Toronto Press, vol. 12(3), pages 438-448, September.
  7. Jeffrey I. Bernstein & Xiaoyi Yan, 1997. "International R&D Spillovers between Canadian and Japanese Industries," Canadian Journal of Economics, Canadian Economics Association, vol. 30(2), pages 276-94, May.
  8. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  9. Zvi Griliches, 1958. "Research Costs and Social Returns: Hybrid Corn and Related Innovations," Journal of Political Economy, University of Chicago Press, vol. 66, pages 419.
  10. Kenneth J. McKenzie, 2005. "Tax Subsidies for R&D in Canadian Provinces," Canadian Public Policy, University of Toronto Press, vol. 31(1), pages 29-44, March.
  11. Marcel Dagenais & Pierre Mohnen & Pierre Therrien, 1997. "Do Canadian Firms Respond to Fiscal Incentives to Research and Development?," CIRANO Working Papers 97s-34, CIRANO.
  12. Pierre Mohnen, 1999. "Tax Incentives: Issue and Evidence," CIRANO Working Papers 99s-32, CIRANO.
  13. Mansfield, Edwin & Switzer, Lorne, 1985. "The effects of R&D tax credits and allowances in Canada," Research Policy, Elsevier, vol. 14(2), pages 97-107, April.
  14. M. Ishaq Nadiri, 1993. "Innovations and Technological Spillovers," NBER Working Papers 4423, National Bureau of Economic Research, Inc.
  15. Bronwyn H. Hall & John van Reenen, 1999. "How Effective are Fiscal Incentives for R&D? A New Review of the Evidence," NBER Working Papers 7098, National Bureau of Economic Research, Inc.
  16. Nadiri, M.I., 1993. "Innovations and Technological Spillovers," Working Papers 93-31, C.V. Starr Center for Applied Economics, New York University.
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Citations

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Cited by:
  1. Van Biesebroeck, Johannes, 2008. "Bidding for investment projects: smart public policy or corporate welfare?," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/253810, Katholieke Universiteit Leuven.
  2. Baghana, Rufin, 2010. "Public R&D Subsidies and Productivity: Evidence from Firm-Level Data in Quebec," UNU-MERIT Working Paper Series 055, United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology.
  3. Kenneth J. McKenzie, 2005. "Tax Subsidies for R&D in Canadian Provinces," Canadian Public Policy, University of Toronto Press, vol. 31(1), pages 29-44, March.

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