A QUICK RECAP:
A recent study conducted by the National Bureau of Economic Research (NBER) has concluded that states with increased R&D tax incentives better support entrepreneurial activity, innovation, and experience greater long term growth. The study examined how the introduction of state-level R&D tax credits in the U.S. affected the rate or composition of new firm formation, as well as the quality-adjusted quantity of entrepreneurship in the given state. The results found that while R&D tax credits provided minimal impact on these factors in the first few years following its introduction, the incentives actually provided an impressive 20% increase in both quantity and quality-adjusted quantity of entrepreneurship over a ten year period.
The study can be found and downloaded <here>
IMPLICATIONS OF THE STUDY:
The research paper introduces a dilemma for policymakers surrounding the subject of tax schemes and entrepreneurship. While the study has found that R&D tax schemes do in fact support the current entrepreneurial environment, it also acknowledges that the effects of these incentives are not realised immediately as it may take years before a company develops a product or service that is market-ready.
In any case, realising the benefits of the tax incentive later on is still better than stifling entrepreneurship and discouraging firms from innovating, which may have adverse long-term effects on the economy. In fact, the study found that U.S. states that chose to prioritize investment tax credits over R&D tax credits experienced little to no impact on the overall quantity and quality-adjusted quantity of new firms founded.
OUR TAKE:
The Australian government plays a crucial role in innovation policy and fostering an environment that is conducive for long-term growth. Despite this, there have been several proposals by government officials to slash the R&D budget due to growing concern over the legitimacy of R&D claims being made. Regulators argue that several claims, and hence incentive payouts, have been going to companies carrying out activities lacking the technical sophistication and advancement that constitute R&D. While true in some cases, this concern can be addressed through better regulation of claims to ensure that funding is properly allocated to the right companies.
The R&D tax scheme provides start-ups with much needed capital to extend their runway to commercial success, and is the single biggest program supporting Australian start-ups. While the current program isn’t perfect, dialogue between both the government and small-business communities may cultivate a better understanding of pressure points within this program, as well as the expectations between parties, to bring on necessary reform to address both sides.
The positive impact of R&D tax incentives on the Australian economy cannot be ignored. With adequate government support, the increase in the number and quality of start-ups as a result of the tax incentive, may foster healthy competition, provide more job opportunities, and most importantly, catalyse innovation that will drive Australia’s long-term economic growth.