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Abstract:

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CEP Discussion Paper
Measuring the Cost Effectiveness of an R&D Tax Credit for the UK
Rachel Griffith, Stephen Redding and John Van Reenen
September 2001
Paper No' CEPDP0509:
Full Paper (pdf)

JEL Classification: H20; O32; O47


Tags: growth; innovation; r&d; tax credit; total factor productivity (tfp)

This paper investigates the economic impact of the government's proposed new UK R&D tax credit. We measure the benefit of the credit by the effect on value added in the short and long?run. This is simulated from existing econometric estimates of the tax?price elasticity of R&D and the effect of R&D on productivity. For the latter we allow R&D to have an effect on technology transfer (catching up with the technological frontier) as well as innovation (pushing the frontier forward). We then compare the increase in value added to the likely exchequor costs of the program under a number of scenarios. In the long?run the increase in GDP far outweighs the costs of the tax credit. The short?run effect is far smaller with value?added only exceeding cost if R&D grows at or below the rate of inflation.