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A Framework for Evaluating Provincial R&D Tax Subsidies

  • Bev Dahlby

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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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. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  2. Marcel Dagenais & Pierre Mohnen & Pierre Therrien, 1997. "Do Canadian Firms Respond to Fiscal Incentives to Research and Development?," CIRANO Working Papers 97s-34, CIRANO.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. M. Ishaq Nadiri, 1993. "Innovations and Technological Spillovers," NBER Working Papers 4423, National Bureau of Economic Research, Inc.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. Nadiri, M.I., 1993. "Innovations and Technological Spillovers," Working Papers 93-31, C.V. Starr Center for Applied Economics, New York University.
  15. 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.
  16. Pierre Mohnen, 1999. "Tax Incentives: Issue and Evidence," CIRANO Working Papers 99s-32, CIRANO.
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