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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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    Cited by:

    1. Rui Costa & Nikhil Datta & Stephen Machin & Sandra McNally, 2018. "Investing in People: The Case for Human Capital Tax Credits," Working Papers 2018-030, Human Capital and Economic Opportunity Working Group.
    2. Norman Gemmell & Richard Kneller & Danny McGowan & Ismael Sanz & José F. Sanz‐Sanz, 2018. "Corporate Taxation and Productivity Catch‐Up: Evidence from European Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(2), pages 372-399, April.
    3. Nicholas Crafts, 2013. "Returning to Growth: Policy Lessons from History," Fiscal Studies, Institute for Fiscal Studies, vol. 34(2), pages 255-282, June.
    4. Andrew Atkeson & Ariel Burstein, 2019. "Aggregate Implications of Innovation Policy," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 2625-2683.
    5. 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.
    6. 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.
    7. Bettina Becker, 2013. "The Determinants of R&D Investment: A Survey of the Empirical Research," Discussion Paper Series 2013_09, Department of Economics, Loughborough University, revised Sep 2013.
    8. repec:cep:cepisp:01 is not listed on IDEAS
    9. Christine Greenhalgh & Mark Longland & Oxford Intellectual Property Research Centre, 2002. "Running to Stand Still? - Intellectual Property and Value Added in Innovating Firms," Economics Series Working Papers 134, University of Oxford, Department of Economics.

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    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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