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Measuring the Cost Effectiveness of an R&D Tax Credit for the UK

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Author Info
Rachel Griffith
Stephen Redding
John Van Reenen

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Abstract

This paper investigates the economic impact of the government's proposed new UK R&D tax credit. We measure the benefit of the credit by the effect on value added in the short and long?run. This is simulated from existing econometric estimates of the tax?price elasticity of R&D and the effect of R&D on productivity. For the latter we allow R&D to have an effect on technology transfer (catching up with the technological frontier) as well as innovation (pushing the frontier forward). We then compare the increase in value added to the likely exchequor costs of the program under a number of scenarios. In the long?run the increase in GDP far outweighs the costs of the tax credit. The short?run effect is far smaller with value?added only exceeding cost if R&D grows at or below the rate of inflation.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0509.

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Date of creation: Sep 2001
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Handle: RePEc:cep:cepdps:dp0509

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Related research
Keywords: Growth; Innovation; R&D; Tax Credit; Total Factor Productivity (TFP);

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Find related papers by JEL classification:
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D
O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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  1. Austan Goolsbee, 1998. "Does Government R&D Policy Mainly Benefit Scientists and Engineers?," NBER Working Papers 6532, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Paul Geroski & Steve Machin & John Van Reenen, 1993. "The Profitability of Innovating Firms," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 198-211, Summer. [Downloadable!] (restricted)
  3. Scherer, F M, 1982. "Inter-Industry Technology Flows and Productivity Growth," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 627-34, November. [Downloadable!] (restricted)
  4. Cohen, Wesley M & Levinthal, Daniel A, 1989. "Innovation and Learning: The Two Faces of R&D," Economic Journal, Royal Economic Society, vol. 99(397), pages 569-96, September. [Downloadable!] (restricted)
  5. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, vol. 91(364), pages 907-18, December. [Downloadable!] (restricted)
  6. Griffith, Rachel & Redding, Stephen J & Van Reenen, John, 2000. "Mapping The Two Faces Of R&D: Productivity Growth In A Panel Of OECD Industries," CEPR Discussion Papers 2457, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Stephen Machin & John Van Reenen, 1998. "Technology And Changes In Skill Structure: Evidence From Seven Oecd Countries," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1215-1244, November. [Downloadable!] (restricted)
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  8. Hall, B.H., 1993. "R & D Tax Policy During the Eighties: Success or Failure?," Papers e-93-1, Stanford - Hoover Institution.
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  9. Leahy, Dermot & Neary, J Peter, 2004. "Absorptive Capacity, R&D Spillovers and Public Policy," CEPR Discussion Papers 4171, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Schankerman, Mark, 1981. "The Effects of Double-Counting and Expensing on the Measured Returns to R&D," The Review of Economics and Statistics, MIT Press, vol. 63(3), pages 454-58, August. [Downloadable!] (restricted)
  11. Jonathan Eaton & Eva Gutierrez & Samuel Kortum, 1998. "European Technology Policy," Boston University - Institute for Economic Development 87, Boston University, Institute for Economic Development.
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  12. Adam B. Jaffe, 1986. "Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits and Market Value," NBER Working Papers 1815, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Hall, Bronwyn & Van Reenen, John, 2000. "How effective are fiscal incentives for R&D? A review of the evidence," Research Policy, Elsevier, vol. 29(4-5), pages 449-469, April. [Downloadable!] (restricted)
  14. Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 495-525, May. [Downloadable!] (restricted)
  15. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christine Greenhalgh & Mark Longland, 2002. "Running to Stand Still? - Intellectual Property and Value Added in Innovating Firms," Economics Series Working Papers 134, University of Oxford, Department of Economics. [Downloadable!]
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