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Investing in People: The Case for Human Capital Tax Credits

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  • Rui Costa
  • Nikhil Datta
  • Stephen Machin
  • Sandra McNally

Abstract

It is now widely recognised that human capital accumulation and research and development (R&D) are key drivers of economic growth, as is documented in most standard textbooks (e.g. Acemoglu, 2007; Romer, 1996). Estimates from the US suggest that increasing levels of human capital over the second half of the last century accounted for approximately one third of productivity growth (Griliches, 1997), while some estimates of the social rate of return to R&D in the manufacturing sector have exceeded one hundred percent (Jones and Williams, 1998). Despite the contribution of both human capital and R&D to economic growth, the UK fiscal system does not treat the two equally when it comes to employer incentives to invest. Specifically, firms that invest in R&D are able to claim generous tax relief on their investments whereas there is no such across-the-board incentive to invest in the training of their workers. This is despite the fact that the rationale for government support to firm investment in human capital is similar to that for R&D and both are important for economic growth. Moreover, this unequal treatment of physical and human capital stands in contrast to practice in many other countries.

Suggested Citation

  • Rui Costa & Nikhil Datta & Stephen Machin & Sandra McNally, 2018. "Investing in People: The Case for Human Capital Tax Credits," CEP Industrial Strategy 01, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepisp:01
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    References listed on IDEAS

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    Cited by:

    1. Jiaqi Li & Anna Valero & Guglielmo Ventura, 2020. "Trends in job-related training and policies for building future skills into the recovery," CVER Research Papers 033, Centre for Vocational Education Research.
    2. Mirko Draca & Jiaqi Li & Sabrina Muller & Viet Nguyen-Tien & Capucine Riom & Anna Valero, 2021. "Are 'green' jobs good jobs?," CEP Reports 39, Centre for Economic Performance, LSE.
    3. Josh De Lyon & Swati Dhingra, 2021. "Real-time updates on the UK economy: trends, expectations and implications from business survey data," CEP Covid-19 Analyses cepcovid-19-026, Centre for Economic Performance, LSE.
    4. Lenihan, Helena & McGuirk, Helen & Murphy, Kevin R., 2019. "Driving innovation: Public policy and human capital," Research Policy, Elsevier, vol. 48(9), pages 1-1.
    5. Bertoni Marco & Brunello Giorgio, 2022. "Training during recessions: recent European evidence," IZA Journal of Labor Policy, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 12(1), pages 1-17, January.
    6. Shafik, Minouche, 2021. "Capitalism needs a new social contract," LSE Research Online Documents on Economics 112213, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    #CEPIndustrialStrategy; Industrial Strategy; Capital Tax Credits;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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