Every country wants to stimulate research and development, butcountries vary greatly in their strategy towards this aim. The UKand The Netherlands have a volume based system of tax credits,meaning that thetotal volumeof a company’s R&D costs define theamount of tax deduction. This stands in contrast with the US andJapan, where tax deduction is ‘increment-based’: it is the extraamount of R&D spending, on top of your normal spending, thatdefines the tax benefit.
No tax deduction in Finland
Finland and Germany stimulate their research and developmentcompletely different: they use no tax credit system at all, butonly foster R&D through subsidies. Professor Pierre Mohnen useseconometric calculations to assess whether this form of publicspending has a ‘net welfare gain’ or a ‘net welfare loss’.
In the case of the Netherlands, the volume based tax deductionsystem results in a ‘net welfare loss’ due to what economists referto as ‘dead weight losses’. “Suppose a company spends € 1000on R&D and all of a sudden they get a 10% tax credit. Thismeans a ‘dead weight loss’ of € 100, since they would have spent €1000 anyway.” According to Mohnen’s calculations, a net welfaregain is not feasible with this form of taxation.
Low administrative cost
Why does The Netherlands opt for this type of R&D stimulusthen? Pierre Mohnen: “You have to take into account that TheNetherlands uses subsidies too. To get a clear picture you wouldhave to compare the taxation system with the subsidy system.”
“One reason for using a volume based tax system, are the lowadministrative costs involved. A subsidy system demands muchmore from governments. But the rewards can also be higher.
Mohnen: “The good thing about R&D tax credits is that theyare neutral: you let the private sector decide on which R&D todo. But… it’s not terribly effective instimulatingmoreR&D.”
Professor Pierre Mohnen presented his work at a conferenceorganized by the Centre for Economic Policy Research (CEPR) incooperation with the Université Libre de Bruxelles, University ofMunich, Universiteit Maastricht and the Katholieke UniversiteitLeuven, among many others.
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