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

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  • Rachel Griffith
  • Stephen Redding
  • John Van Reenen

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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Bibliographic Info

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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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Related research

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

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References

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  1. 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.
  2. Machin, S. & Van Reenen, J., 1997. "Technology and Changes in Skill Structure: Evidence from Seven OECD Countries," Papers, Centre for Economic Performance & Institute of Economics 24, Centre for Economic Performance & Institute of Economics.
  3. Zvi Griliches, 1991. "The Search for R&D Spillovers," NBER Working Papers 3768, National Bureau of Economic Research, Inc.
  4. Rachel Griffith & Stephen Redding & John Van Reenen, 2000. "Mapping the Two Faces of R&D: Productivity Growth in a Panel of OECD Industries," CEP Discussion Papers, Centre for Economic Performance, LSE dp0458, Centre for Economic Performance, LSE.
  5. Cohen, Wesley M & Levinthal, Daniel A, 1989. "Innovation and Learning: The Two Faces of R&D," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(397), pages 569-96, September.
  6. 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.
  7. Goolsbee, Austan, 1998. "Does Government R&D Policy Mainly Benefit Scientists and Engineers?," American Economic Review, American Economic Association, American Economic Association, vol. 88(2), pages 298-302, May.
  8. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, Econometric Society, vol. 60(2), pages 323-51, March.
  9. Dermot Leahy & J Peter Neary, 2004. "Absorptive Capacity, R&D Spillovers, and Public Policy," Working Papers, School Of Economics, University College Dublin 200418, School Of Economics, University College Dublin.
  10. Jonathan Eaton & Eva Gutierrez & Samuel Kortum, 1998. "European technology policy," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(27), pages 403-438, October.
  11. Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(2), pages 495-525, May.
  12. Stephen Redding & James Proudman, 1998. "Productivity convergence and international openness," Bank of England working papers, Bank of England 77, Bank of England.
  13. Rachel Griffith & David Sandler & John Van Reenen, 1995. "Tax incentives for R&D," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 16(2), pages 21-44, May.
  14. G Cameron, 1996. "Innovation and Economic Growth," CEP Discussion Papers, Centre for Economic Performance, LSE dp0277, Centre for Economic Performance, LSE.
  15. Klette, T.J. & Moen, J. & Griliches, Z., 1999. "Do Subsidies to Commercial R&D Reduce Market Failures? Microeconometric Evaluation Studies," Papers, Norwegian School of Economics and Business Administration- 16/99, Norwegian School of Economics and Business Administration-.
  16. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 91(364), pages 907-18, December.
  17. Zvi Griliches, 1998. "R&D and Productivity: The Econometric Evidence," NBER Books, National Bureau of Economic Research, Inc, number gril98-1, July.
  18. Nick Bloom & Rachel Griffith & John Van Reenen, 1999. "Do R&D tax credits work? Evidence from an international panel of countries 1979-1994," IFS Working Papers, Institute for Fiscal Studies W99/08, Institute for Fiscal Studies.
  19. 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.
  20. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  21. Hall, Bronwyn & Van Reenen, John, 2000. "How effective are fiscal incentives for R&D? A review of the evidence," Research Policy, Elsevier, Elsevier, vol. 29(4-5), pages 449-469, April.
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Citations

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Cited by:
  1. Daniel Burghart & Trudy Cameron & Geoffrey Gerdes, 2007. "Valuing publicly sponsored research projects: Risks, scenario adjustments, and inattention," Journal of Risk and Uncertainty, Springer, Springer, vol. 35(1), pages 77-105, August.
  2. Andrew Atkeson & Ariel Burstein, 2011. "Aggregate implications of innovation policy," Staff Report, Federal Reserve Bank of Minneapolis 459, Federal Reserve Bank of Minneapolis.
  3. 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.
  4. Bettina Becker, 2013. "The Determinants of R&D Investment: A Survey of the Empirical Research," Discussion Paper Series, Department of Economics, Loughborough University 2013_09, Department of Economics, Loughborough University, revised Sep 2013.
  5. Norman Gemmel & Richard Kneller & Danny McGowan & Ismael Sanz, 2013. "Corporate Taxation and Productivity Catch-Up: Evidence from European Firms," Working Papers 13001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

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