What Does it Take for an R&D Tax Incentive Policy to be Effective?

32 Pages Posted: 5 Nov 2009

See all articles by Pierre Mohnen

Pierre Mohnen

Maastricht University - UNU-MERIT

Boris Lokshin

Maastricht University, School of Business and Economics

Date Written: April 1, 2009

Abstract

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 do 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.

Keywords: R&D tax credits, policy evaluation, cost-benefit analysis

JEL Classification: O32, O38, H25, H50

Suggested Citation

Mohnen, Pierre and Lokshin, Boris, What Does it Take for an R&D Tax Incentive Policy to be Effective? (April 1, 2009). CIRANO - Scientific Publications 2009s-11. Available at SSRN: https://ssrn.com/abstract=1499876 or http://dx.doi.org/10.2139/ssrn.1499876

Pierre Mohnen (Contact Author)

Maastricht University - UNU-MERIT ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
31-43-3884464 (Phone)
31-43-3884495 (Fax)

Boris Lokshin

Maastricht University, School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3697 (Phone)
+31 43 325 4893 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
280
Abstract Views
1,191
rank
116,985
PlumX Metrics