Template-type: ReDIF-Paper 1.0
Author-Name: Mohnen, Pierre
Author-Email: p.mohnen@merit.unimaas.nl
Author-Workplace-Name: UNU-MERIT
Author-Name: Lokshin, Boris
Author-Email: b.lokshin@os.unimaas.nl
Author-Workplace-Name: UNU-MERIT
Title: What does it take for an R&D tax incentive policy to be effective?
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 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.
Classification-JEL: O32, O38, H25, H50
Keywords: R&D tax credits, R&D, tax credits, policy evaluation, cost-benefit analysis
Series: UNU-MERIT Working Papers
Creation-Date: 2009
Number: 014
File-URL: http://www.merit.unu.edu/publications/wppdf/2009/wp2009-014.pdf
File-Format: application/pdf
File-Size: 275 Kb
Handle: RePEc:unm:unumer:2009014