Adjusting the tax concession on research and development could have a significant impact on university and industry partnerships, say academics, in what could be a repeat of the 1996 reduction that hit collaboration hard.
The issue is being discussed ahead of the release of a discussion paper by the government’s business tax working group, which was due to be released at the beginning of this month. The Australian reports the working group is considering a cap on deductions for research by companies with turnover of more than $20 million.
“Our current and future prosperity depends on innovation and research,“ Greens MP Adam Bandt said today, joining others including CSIRO chairman Simon McKeon, and Universities Australia chief executive Belinda Robinson, in publicly seeking to warn the government against cutting R&D tax incentives.
“There was an immediate and obvious change in the amount of collaborative research being done by industry and universities following a reduction in the tax concession in the mid-nineties,” said University of Melbourne Laureate Professor Rod Tucker.
In 1996 the government reduced the rate for deductions from 150% to 125%.
“I think it was a great step backwards at the time,” Professor Tucker said. Professor Tucker heads up the Centre for Energy–Efficient Telecommunications, which is a partnership between the University of Melbourne, and Alcatel-Lucent-owned research group Bell Labs.
“My experience is there has been a direct correlation between, not surprisingly, the R&D tax concessions and the amount of interaction between industry and universities.”
In 2010, a Senate Committee inquiry was held into the scheme, finding it too restrictive and complex. In 2011 the R&D Tax Concession, which had offered deductions of up to 125%, was replaced by the R&D Tax Incentive, which offered different levels of tax offsets equivalent to a 150% deduction, depending on the company’s level of turnover.
The current discussion comes amid speculation the government is still looking for ways to fund a cut to the corporate tax rate.
Dr Rod Lamberts, who is deputy director of the Australian National Centre for Public Awareness of Science at the Australian National University, said the discussion sends a message that the government is devaluing research and development.
“I do think it would have a negative affect, but I’m mostly appalled at this type of thinking. R&D does good stuff – it doesn’t always pay off dollar for dollar but once it does it pays off really well, and not just financially,” Dr Lamberts said.
George Michaelson
Person
I was lucky enough to work in a CRC during the first round of funding (the larger tax offset years) and also the second.
I see both sides of this problem. Good R&D demands risk money: speculative funding, with long-term vision. This is hard to find. People need incentivising, and tax offsets provide a net-present-value which can justify converting money into risk funding for an unknown future outcome.
The other side of the coin is the mandatory IPR issue the CRC faced, and which I think (on no evidence I might add, but I am also an ex-CSIRO employee) CSIRO faces: there is a huge pressure to achieve commercial returns on investment. This is inherently short-term thinking.
Its a contradiction.
John Coochey
Mr
I was a visiting economist at the Department of Science when Hawke acceded to Statyer and introduced the tax incentive for R&D and we had found no evidence that this would benefit the Australian economy, no advice was given to him to that effect and many of the assertions such as such incentives existed in other countries which had benefited from them were total lies. A colleague of mine lost his job for going public on this. Now I am retired I can speak freely. The problem was and is that the science lobby looks on things rather like a league table how many gold medals did we win rather than looking dispassionately at the results. Assets should be depreciated over their economic life for tax purposes.
Ian Ross-Gowan
logged in via LinkedIn
Assets under the R&D tax concession and under the R&D tax incentive are depreciated over their economic life. This was changed a long time ago.
BERD increased from 0.39% GDP in 1985 to 1.35% by 2008 proving the success of the R&D tax concession in encouraging more businesses to do more R&D. Every study showed that the R&D tax concession was a contributing factor in productivity growth and economic growth in Australia over this period. Personally I know of a large number of R&D projects that were done earlier or in more depth because of the previous program. With manufacturing on the ropes the last thing we should is remove encouragement for them to do R&D in Australia
Mark Harrigan
Dr
Did you look for evidence at the time? Can you quote evidence now that it has no impact? What evidence can you offer that counters the clear benefits Ian Ross-Gowan has established above?
Or is this just another opinionated post from you without substantiation?
Kevin Cox
Kevin Cox is a Friend of The Conversation.
logged in via LinkedIn
The R&D tax incentive is an excellent program that encourages investment in Research and Development. It is a relatively simple program and is far superior to grants and other similar allocation of funds by governments to encourage R&D. It should be expanded.
John Coochey
Mr
I have to agree with you on grants, I have had hands on experience with the NERRDC, AIRDIS, GIRD and Defence's DID Program and all of them merely squandered money frequently corruptly with Public Servants getting post separation employment. AIRDIS gave grants to for example a fresh water crayfish farm in WA which attempted to ship live crays to the Eastern States forgetting there were such farms in the east anyway. However I have never seen a case for tax incentives. Where is the market failure which makes business managers act irrationally? What are the externalities or market failure?
Peter Davies
Bio-refinery technology developer
I would agree that the R&D Tax incentives are far superior to grants. Grants can distort the market since they reward some companies over others, irrespective of whether they are competitors or the technical advantage of what they might offer ("merit" based competitive grants are in our experience a farce, with some companies continuing to be repeatedly supported despite constant market failure), giving the receiving company much more than a simple financial advantage as they also gain quite a bit…
Read moreIan Ross-Gowan
logged in via LinkedIn
The market failure is that businesses do not invest enough in R&D for the future without incentives - especially as many countries have R&D incentives. This is shown in the BERD figures.
The externalities are in the retention of technical knowledge within or for Australian businesses. If technical investment does fall as it did in 1996 when the R&D tax concession was halved then this can result in businesses that supply technical expertese losing business and no longer being viable. Experts will follow the work overseas. Other businesses reliant on these will then need to source from overseas resulting in further dumbing down in Australia. With fewer technical jobs here there will be fewer collaborations reducing Uni tech businesses, less reasons for foreign students to come here, less reasons for Australian students to learn or stay here post grad.
John Coochey
Mr
That is neither a case of market failure nor externality. I have not followed studies closely in recent years but I remember a CSIRO study which showed all that had happened was more activity had been defined as R&D to get the subsidy. If you give the official definition of an externality it will be clear that this does not meet the criteria.
Ian Ross-Gowan
logged in via LinkedIn
I don't wish to argue definitions except to say that if the market fails to invest enough in R&D without effective encouragement then this is a market failure. And the existence of an effective technology infrastructure is an externality by definition as is any infrastructure not specifically paid for in the production or consumption of good and services.
This is moot anyway. The point of the article is that if we cut or kill the R&D tax incentive and this results in the dramatic drop in BERD that the 1996 cut did then we will all be worse off in the long run. It would be such a shame if this occurred simply to give businesses that don't undertake R&D a tax break.
John Coochey
Mr
Actually market failure is not when you do not get what you might like it is where market forces cannot allocate factors optimally for example a public good eg GPS or a common good e.g. fisheries. An externallty is a cost or benefit which does not appear in the supply or demand curve. If you undertake research which gives a benefit that is a benefit which can normally be protected (patented for example) where it does not give a benefit it was a bad choice. That is the risk that entrepeneurs make. There is no externality there.
Ian Ross-Gowan
logged in via LinkedIn
A market failure is where market forces misallocate resources such as where market forces do not lead to optimal allocations of resources to, for example, future growth from R&D.
An externality includes infrastructure and technological developments - for both refer the OECD definition in Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993. An eaxample of an externality from this definition is "The invention of the transistor generated numerous positive externalities in the manufacture of modern telecommunication, stereo and computer equipment."
And this still ignores the point that reducing encouragement for BERD reduces business expenditure on R&D as proven in 1996. We will all suffer if this occurs and it makes no sense to trade this away to give a tax break to businesses that don't do R&D.
John Coochey
Mr
And your evidence that market forces will lead to sub optimal R&D is? What is the ideal percentage of GNP to be spent on R&D and does anyone have an example of successful expenditure which would not have occurred in the absence of the tax incentive?
Ian Ross-Gowan
logged in via LinkedIn
See my earlier post:
"BERD increased from 0.39% GDP in 1985 to 1.35% by 2008 proving the success of the R&D tax concession in encouraging more businesses to do more R&D. Every study showed that the R&D tax concession was a contributing factor in productivity growth and economic growth in Australia over this period. Personally I know of a large number of R&D projects that were done earlier or in more depth because of the previous program. With manufacturing on the ropes the last thing we should is remove encouragement for them to do R&D in Australia"
What ever the optimal amount would be it is not 0.39% GDP by any stretch of the imagination. 1.35% is still less than the OECD average.
John Coochey
Mr
You forget the nuances of National Income accounting (when I examined this in the early eighties it could account for much of the differences) and also assume "Four legs good, two legs bad" in that all R&D is beneficial. To give some examples from my own experience. The now thankfully defunct DID grants program gave over a million dollars to a Queanbeyan firm to make a Multiple Use Gunsightt primarily for the fifty caliber machine gun, together with tax write offs. Nothing functional was ever produced…
Read moreMark Harrigan
Dr
Selective anecdotes do not constitute evidence in this matter. Either way. As someone who professes economic literacy you should know that.
It's apparent you have no idea what's involved in R&D. Failure is expected, Success hoped for. Benefits from R&D go beyond either.
Ross-Gowan points to studies that clearly shows the economic benefits of R&D. This is clear from studies almost everywhere in the world. Your refutations hold no substance
Ian Ross-Gowan
logged in via LinkedIn
It is the potential for the failures you have identified that causes the market failure of sub optimal allocation of resources to R&D. However according to studies by, or for, Treasury, the Productivity Commission and AusIndustry on the whole the Government made more money from providing the R&D tax concession than it ever cost it. It made this from the tax payable on profits from the successful R&D projects. For successful projects the only cost is a timing difference - the businesses doing R&D get a cashflow benefit whilst doing it but, if successful, pay back generally more from the higher profits on the new or improved products or processes resulting from the R&D.
John Coochey
Mr
Thankyou Mark for rebutting Ian. Commercial decisions should be taken on commercial grounds What benefits go beyond failure as someone with basic literacy I thought you would know that. Taxation is essentially a zero sum game, one man's tax concession is another's tax increase. Any alleged benefits from tax concessions must be matched against the counterfactual question of how much other firms taxes have increased. In the case of any survey the issue of strategic answering must also be considered…
Read moreMark Harrigan
Dr
My comment is not a rebuttal of Ian. It is a rebuttal of your apparent illteracy in relation to R&D. It would appear you also have some gaps in your knowledge of economics
If you think Tax is a zero sum game then you have no idea about economics. If that were true the overal tax take would never change. It does. In response to GDP and the overall tax mix. Some taxation appraches are more effective than others, both in terms of economic efficiency and economic incentive.
The question in…
Read moreJohn Coochey
Mr
Actually I was not aware that any evidence in favor of tax incentives had been produced but then there are non as blind as those who do not wish to see. The arguments for tax incentives are like those for Offsets on overseas purchases if they work well at fifteen per cent (they do not actually) why stop there why not a hundred per cent offset or tax concession? If a little is good more is surely better this is not homeopathic medicine, given that quote "Australian manufacturing is on the ropes" it does not seem to have been a successful policy.
Mark Harrigan
Dr
There are indeed none so blind as those who do not wish to see.
Stupidity is also the deliberate cultivation of ignorance
http://in3.dem.ist.utl.pt/master/stpolicy03/temas/tema6_1a.pdf
Read more"This article critically reviews the literature on the economic benefits of publicly funded basic research. In that literature, three main methodological approaches have been adopted — econometric studies, surveys and case studies. Econometric studies are subject to certain methodological limitations but they…
Peter Davies
Bio-refinery technology developer
Our experience over the last 3 years of attempting to access University, CRC & CSIRO research services is that they are entirely politically driven and self serving. We have been told directly that we are "5 years ahead of where Government and Industry want us to be" and that our own technology development success which we had been trying to get help to better quantify and understand "Puts at risk millions of dollars in future research funding".
Too many research bureaucracies are only interested in research that leads to more research, not to solutions, unless of course they fully control the IP and distribution rights themselves. Everyone else need not apply. Tinkering with R&D tax concessions is not going to help engage universities more when they don't wish to be engaged.