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

  • Rachel Griffith

    ()

    (Institute for Fiscal Studies)

  • Stephen Redding

    ()

    (Institute for Fiscal Studies and University College London)

  • John Van Reenen

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.

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Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 22 (2001)
Issue (Month): 3 (September)
Pages: 375-399

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Handle: RePEc:ifs:fistud:v:22:y:2001:i:3:p:375-399
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  1. 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.
  2. 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.
  3. Jaffe, Adam B, 1986. "Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits, and Market Value," American Economic Review, American Economic Association, vol. 76(5), pages 984-1001, December.
  4. 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.
  5. 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.
  6. Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
  7. 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.
  8. 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.
  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 454-58, August.
  10. Jonathan Eaton & Eva Gutierrez & Samuel Kortum, 1998. "European Technology Policy," NBER Working Papers 6827, National Bureau of Economic Research, Inc.
  11. Austan Goolsbee, 1998. "Does Government R&D Policy Mainly Benefit Scientists and Engineers?," NBER Working Papers 6532, National Bureau of Economic Research, Inc.
  12. 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 W99/08, Institute for Fiscal Studies.
  13. Stephen Redding & James Proudman, 1998. "Productivity convergence and international openness," Bank of England working papers 77, Bank of England.
  14. 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-.
  15. Rachel Griffith & Stephen Redding & John Van Reenen, 2000. "Mapping the two faces of R&D : productivity growth in a panel of OECD industries," LSE Research Online Documents on Economics 784, London School of Economics and Political Science, LSE Library.
  16. Zvi Griliches, 1998. "R&D and Productivity: The Econometric Evidence," NBER Books, National Bureau of Economic Research, Inc, number gril98-1, June.
  17. Rachel Griffith & David Sandler & John Van Reenen, 1995. "Tax incentives for R&D," Fiscal Studies, Institute for Fiscal Studies, vol. 16(2), pages 21-44, May.
  18. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  19. 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.
  20. 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.
  21. G Cameron, 1996. "Innovation and Economic Growth," CEP Discussion Papers dp0277, Centre for Economic Performance, LSE.
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