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Measuring the cost-effectiveness of an R&D tax credit for the UK

Author

Listed:
  • Rachel Griffith

    () (Institute for Fiscal Studies)

  • Stephen Redding

    () (Institute for Fiscal Studies and University College London)

  • 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 runs. This is simulated from existing econometric estimates of the tax-price elasticity of research and development (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 exchequer costs of the programme 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.

Suggested Citation

  • Rachel Griffith & Stephen Redding & John Van Reenen, 2001. "Measuring the cost-effectiveness of an R&D tax credit for the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 22(3), pages 375-399, September.
  • Handle: RePEc:ifs:fistud:v:22:y:2001:i:3:p:375-399
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    References listed on IDEAS

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    1. Rachel Griffith & Stephen Redding & John Van Reenen, 2004. "Mapping the Two Faces of R&D: Productivity Growth in a Panel of OECD Industries," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 883-895, November.
    2. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, pages 323-351.
    3. Leahy, Dermot & Neary, J. Peter, 2007. "Absorptive capacity, R&D spillovers, and public policy," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 1089-1108, October.
    4. Jonathan Eaton & Eva Gutierrez & Samuel Kortum, 1998. "European technology policy," Economic Policy, CEPR;CES;MSH, pages 403-438.
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    7. Goolsbee, Austan, 1998. "Does Government R&D Policy Mainly Benefit Scientists and Engineers?," American Economic Review, American Economic Association, vol. 88(2), pages 298-302, May.
    8. Zvi Griliches, 1998. "R&D and Productivity: The Econometric Evidence," NBER Books, National Bureau of Economic Research, Inc, number gril98-1, January.
    9. 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 454-458, August.
    10. Nicolas 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 W99/08, Institute for Fiscal Studies.
    11. Klette, T.J. & Moen, J. & Griliches, Z., 1999. "Do Subsidies to Commercial R&D Reduce Market Failures? Microeconometric Evaluation Studies," Papers 16/99, Norwegian School of Economics and Business Administration-.
    12. Rachel Griffith & David Sandler & John Van Reenen, 1995. "Tax incentives for R&D," Fiscal Studies, Institute for Fiscal Studies, pages 21-44.
    13. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, vol. 91(364), pages 907-918, December.
    14. Stephen Redding & James Proudman, 1998. "Productivity convergence and international openness," Bank of England working papers 77, Bank of England.
    15. Stephen Machin & John Van Reenen, 1998. "Technology and Changes in Skill Structure: Evidence from Seven OECD Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 113(4), pages 1215-1244.
    16. Scherer, F M, 1982. "Inter-Industry Technology Flows and Productivity Growth," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 627-634, November.
    17. 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 569-596, September.
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    19. Zvi Griliches, 1998. "The Search for R&D Spillovers," NBER Chapters,in: R&D and Productivity: The Econometric Evidence, pages 251-268 National Bureau of Economic Research, Inc.
    20. repec:hoo:wpaper:e-93-1 is not listed on IDEAS
    21. 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.
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    Citations

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    Cited by:

    1. Andrew Atkeson & Ariel Burstein, 2011. "Aggregate implications of innovation policy," Staff Report 459, Federal Reserve Bank of Minneapolis.
    2. Nicholas Crafts, 2013. "Returning to Growth: Policy Lessons from History," Fiscal Studies, Institute for Fiscal Studies, vol. 34(2), pages 255-282, June.
    3. Daniel Burghart & Trudy Cameron & Geoffrey Gerdes, 2007. "Valuing publicly sponsored research projects: Risks, scenario adjustments, and inattention," Journal of Risk and Uncertainty, Springer, vol. 35(1), pages 77-105, August.
    4. Harris, Richard & Li, Qian Cher & Trainor, Mary, 2009. "Is a higher rate of R&D tax credit a panacea for low levels of R&D in disadvantaged regions?," Research Policy, Elsevier, vol. 38(1), pages 192-205, February.
    5. Alberto A. Gaggero & Claudio A. Piga, 2011. "Airline Market Power and Intertemporal Price Dispersion," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 552-577, December.
    6. Gemmell, Norman & Kneller, Richard & McGowan, Danny & Sanz, Ismael & Sanz-Sanz, José F., 2013. "Corporate Taxation and Productivity Catch-Up: Evidence from European firms," Working Paper Series 2705, Victoria University of Wellington, Chair in Public Finance.
    7. 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.

    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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