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What does it take for an R&D tax incentive policy to be effective?

Listed author(s):
  • Mohnen, Pierre

    ()

    (UNU-MERIT)

  • Lokshin, Boris

    ()

    (UNU-MERIT)

While in 1996, 12 OECD countries offered R&D tax incentives, in 2008 this number increased to 21. Most countries have opted for level-based instead of incremental R&D tax incentives. This paper takes a critical look at how the effectiveness of R&D tax incentives has been assessed in recent evaluations. Whether based on structural models estimating a price elasticity of R&D or on treatment evaluation methods, most studies estimate the cost effectiveness ratio or additionality. If the cost effectiveness ratio is greater than 1, or firms to more R&D than before, the policy is considered to be effective. A more proper net welfare evaluation of this policy should also include administration, compliance and transfer costs, the marginal burden of taxation, as well R&D externalities and the indirect effects on innovation and productivity. The net welfare gain is shown to be sensitive to a certain number of parameters that are not always estimated with great precision. In particular, the transfer cost or deadweight loss associated with level-based tax incentives is shown to depend on the size of the firm, or more precisely its ex-ante R&D level. We report on the success of a past policy changes in the Netherlands and simulate the effect of various parameter changes in the existing Dutch R&D tax incentive scheme. We show that introducing marginal changes in the schemes's parameters has little impact of increased R&D spending. The policy is more effective for small firms than for large firms. We end with a discussion of the pros and cons of level-based versus incremental R&D tax incentives.

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File URL: http://www.merit.unu.edu/publications/wppdf/2009/wp2009-014.pdf
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Paper provided by United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT) in its series MERIT Working Papers with number 014.

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Date of creation: 2009
Handle: RePEc:unm:unumer:2009014
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  1. Rufin Baghana & Pierre Mohnen, 2009. "Effectiveness of R&D tax incentives in small and large enterprises in Québec," Small Business Economics, Springer, vol. 33(1), pages 91-107, June.
  2. Bloom, Nick & Griffith, Rachel & Van Reenen, John, 2002. "Do R&D tax credits work? Evidence from a panel of countries 1979-1997," Journal of Public Economics, Elsevier, vol. 85(1), pages 1-31, July.
  3. Crepon, B. & Duguet, E. & Mairesse, J., 1998. "Research Investment, Innovation and Productivity: An Econometric Analysis at the Firm Level," Papiers d'Economie Mathématique et Applications 98.15, Université Panthéon-Sorbonne (Paris 1).
  4. Mörk, Eva & Sjögren, Anna & Svalelryd, Helena, 2008. "Cheaper child care, more children," Working Paper Series 2008:29, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  5. Bloom, Nicholas & Griffith, Rachel & Van Reenen, John, 2000. "Do R&D Credits Work? Evidence From A Panel Of Countries 1979-97," CEPR Discussion Papers 2415, C.E.P.R. Discussion Papers.
  6. Jones, Charles I & Williams, John C, 2000. "Too Much of a Good Thing? The Economics of Investment in R&D," Journal of Economic Growth, Springer, vol. 5(1), pages 65-85, March.
  7. Czarnitzki, Dirk & Hanel, Petr & Rosa, Julio Miguel, 2011. "Evaluating the impact of R&D tax credits on innovation: A microeconometric study on Canadian firms," Research Policy, Elsevier, vol. 40(2), pages 217-229, March.
  8. Bruno Crepon & Emmanuel Duguet & Jacques Mairesse, 1998. "Research, Innovation And Productivity: An Econometric Analysis At The Firm Level," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 7(2), pages 115-158.
  9. Marcel Dagenais & Pierre Mohnen & Pierre Therrien, 1996. "Les firmes canadiennes répondent-elles aux incitations fiscales à la recherche-développement? (rapport final)," CIRANO Project Reports 1996rp-03, CIRANO.
  10. Emmanuel Duguet, 2008. "L’effet du credit d’impôt recherche sur le financement privé de la recherche : une évaluation économétrique," Documents de recherche 08-08, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  11. Lokshin, Boris & Mohnen, Pierre, 2007. "Measuring the Effectiveness of R&D Tax Credits in the Netherlands," MERIT Working Papers 025, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  12. 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.
  13. Jacques Mairesse & Benoît Mulkay, 2004. "Une evaluation du credit d’impot recherche en France, 1980-1997," Working Papers 2004-43, Center for Research in Economics and Statistics.
  14. Cappelen, Ådne & Raknerud, Arvid & Rybalka, Marina, 2012. "The effects of R&D tax credits on patenting and innovations," Research Policy, Elsevier, vol. 41(2), pages 334-345.
  15. Hollander, Abraham & Haurie, Alain & L'Ecuyer, Pierre, 1987. "Ratchet effects and the cost of incremental incentive schemes," Journal of Economic Dynamics and Control, Elsevier, vol. 11(3), pages 373-389, September.
  16. 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.
  17. Dagenais, Marcel & Mohnen, Pierre & Therrien, Pierre, 2004. "Les firmes canadiennes répondent-elles aux incitations fiscales à la recherche-développement?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 80(2), pages 175-205, Juin-Sept.
  18. Daniel J. Wilson, 2005. "Beggar thy neighbor? the in-state vs. out-of-state impact of state R&D tax credits," Working Paper Series 2005-08, Federal Reserve Bank of San Francisco.
  19. repec:crs:wpaper:9833 is not listed on IDEAS
  20. 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.
  21. 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.
  22. repec:crs:wpaper:9657 is not listed on IDEAS
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