The Business Tax Working Group discussion paper’s suggestion to reduce the R&D tax incentive reveals a clear-cut attitude to policy aimed at Australia’s economic development: “It’s all about the tax take.”
The point of having policies in support of R&D is to advance Australia’s economy and assist the ability of our firms in both producing new technologies and adapting and adopting technologies developed elsewhere. By doing this, it is presumed that Australian firms will be able to export advanced products and rapidly adjust to innovations from overseas.
The complexities of how R&D is transformed into economic benefits are simply ignored in the discussion paper. Fundamentally, the working group assumes that tax rates drive investment and innovation in firms, despite the paucity of evidence about this. Thus, they assume reducing tax rates will be more affective in creating an open, flexible and dynamic economy than improving the technological problem solving capabilities in the economy through encouraging R&D.
Why do firms do R&D? And how does this relate to the tax incentive?
The evidence shows R&D is more an intermittent activity than an ongoing one for most firms. Large ongoing corporate R&D labs are rare. Firms do R&D for a specific purpose: to update a product or process; to imitate competitors; or to work through a new innovation. They do this for many reasons, but mostly for competitive ones – if they don’t their competitors will take their market and so their profits.
The tax implications of these investment decisions are typically fairly low on the list of important decision factors. However, a better tax treatment does make justifications for R&D investments easier: a fact which partly drove the change from the R&D tax concession scheme to the R&D tax incentive scheme, as some large (typically mining) firms structured massive investments to reap the concession on investments that were legally R&D, but maybe won’t be under the new scheme.
That tax rates do not drive most R&D decisions can be seen in the reaction to the Howard government’s reduction in the old R&D tax scheme, where total R&D levels dropped then picked up to record levels over time. R&D incentives have an effect, but only at the margin. So we can assume a similar reaction will occur; a reduction in R&D spend followed by a slow increase as competitive pressures force firms to invest in R&D.
Does this matter? Yes!
This policy, and others supporting economic development, are not done to help individual firms. They are done to support a system. The more R&D done, the greater the skills and resources to do R&D – and the more firms learn to use R&D to improve their competitive position.
Australia has a low R&D spend comparatively, and R&D is the core of technological innovation. Technological innovation drives long-run economic development worldwide. Imagine our economy if we did not have cars or computer technology. The more firms doing R&D, the more likely they are to link with the public research system, and other area of low performance in Australia.
A general tax break may (or may not) support this ability to support technological innovation. Given most Australian firms' low focus on technological innovation, it is likely that the system will be weakened. This matters because if R&D increases competitiveness, it should lead to more and better paid jobs and higher company earnings, thus increasing the tax take. The discussion paper appears to not take into account why we have an R&D tax incentive scheme in the first place.
To me, the most important thing this discussion paper shows is the government’s attitude to our economic development. We know from many studies that innovation drives growth and development. We also know that technological innovation is the key long term driver of economic development. Tax rates are neither here nor there compared to entrepreneurial attitude and the specialised resources required for R&D. Low taxes do not beat the ability to do something your competitors cannot do. Essentially, this discussion paper indicates the underlying belief that growth comes from low taxes.
So we have a proposal for future policy that excludes innovation and technological change, but assumes that lower corporate tax equals growth. However, as economies have become more developed their tax takes have increased from around 10% of GDP at the start of the twentieth century to 35-50% now. In general, growth rates have increased. Low tax rates do not drive growth!
The likelihood of cutting the R&D tax support scheme indicates the government’s attitude of neglect to what drives our jobs, incomes and lifestyles in the long run.
John Coochey
Mr
I would be interested on your views about who actually pays corporate tax, it may come via corporations but is it the customer who ultimately pays. Normally those advocated tax incentives for R&D do not realize that they are also supporters of Reaganomics via the Laffer Curve.
Robert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
Of course the income gained from customers pays for corproate tax in the end. But who pays for tax is not the issue here to me. The most interesting aspect of this proposal (cutting the R&D Tax Incentive - entirely or in part) is that it subverts the entire reason for supporting R&D, and technological capabilities in the first place. The underpinning belief of Treasury seems to be that lower corporate tax = more innovation. As far as I am aware there is no research showing such a link. In fact some higher taxing countries (Sweden, Germany etc) perform much more R&D and lead in technological innovation. This is not a real issue for this year, or next, but for the decades from now. Once your technological capabilities are behind other nations the other nations can do things you cannot. This tax incentive issue is simply an indication of a lack of understanding of how economic development occurs.
John Coochey
Mr
You have missed the point, if in fact all companies are on a cost plus basis then the level of tax would be largely irrelevant as it would be passed on to their customers, competition on this aspect would not occur because all would face the same tax level.
Robert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
Um, I wrote about the R&D tax incentive scheme, and why we have that scheme in the first place. The incentive is to encourage firms to do a particualr activity - R&D. Why R&D?? Because technological change drives growth over the long run, and R&D is important in technological change. It's well known firms do less R&D than 'optimal', especially in Australia. So increasing R&D helps firms, overall. And increased R&D increases Australia's ability to deal with technological change. Firms elsewhere will still innovate and if we cannot deal with it then opportunities are lost. The main thing to me is the attitude of Treasury. If we do not support capabilities to innovate and other nations do then over time (decades) we will get behind them.
Robert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
Um, I wrote about the R&D tax incentive scheme, and why we have that scheme in the first place. The incentive is to encourage firms to do a particualr activity - R&D. Why R&D?? Because technological change drives growth over the long run, and R&D is important in technological change. It's well known firms do less R&D than 'optimal', especially in Australia. So increasing R&D helps firms, overall. And increased R&D increases Australia's ability to deal with technological change. Firms elsewhere will still innovate and if we cannot deal with it then opportunities are lost. The main thing to me is the attitude of Treasury. If we do not support capabilities to innovate and other nations do then over time (decades) we will get behind them.
John Coochey
Mr
Before the Conversation degenerates into its usual slanging match I would recommend studying two critical concepts. One is the B-Index developed in Canada in the early eighties which allows a more exact assessment of different tax incentives usually between different countries. This is because the issue is much more complicated than many, usually natural sciences, realise. For example if tax rates fall then the concession is worth less. Likewise if other concessions are available or s start up firm is not paying tax then again what could nominally be a large concession has little effect. Another issue which has to be examined is that of fully franked dividends which can wipe out any incentives from R&D concessions.
Mark Harrigan
Dr
What matters is whether or not such concessions are effective in promoting productuve R&D that benefits the economy overall more than their cost, and that otherwise would have been unlikely to occur, and what is the optimum level of such concessions before they start to produce diminishing returns.
The available evidence suggests we are well short of optimal.
Here are two references that make a fairly clear case for maintaining or even improving effective tax concessions.
http://in3.dem…
Read moreJohn Coochey
Mr
There is one thing that really, really pisses me off about this blog in particular and that is being directed to references which do not support what they are supposed to, it wastes my time. A quick glance at the first reference shows it alludes to other research showing such things as a 43 per cent private return on R&D. If that is the case with current interest rates being around five per cent then there is no need for further incentives,
Mark Harrigan
Dr
And if there's one thing that P's me off is when people cherry pick a single number at the extreme end of a range to make a spurious point out of context.
The full tavle is here
Estimates of private and social rates of return to private R&D
spending
Studies Private rate Social rate
of return Ž%. of returnŽ%.
Minnasian Ž1962. 25 –
Nadiri Ž1993. 20–30 50
Mansfield Ž1977. 25 56
Terleckyj Ž1974. 27 48–78
Sveikauskas Ž1981. 10–23 50
Goto and Suzuki Ž1989. 26 80
Mohnen and Lepine Ž1988. 56 28
Bernstein and Nadiri Ž1988. 9–27 10–160
Scherer Ž1982, 1984. 29–43 64–147
Bernstein and Nadiri Ž1991. 14–28 20–110
Mark Harrigan
Dr
Damn, that didn't post too well!
The full table can be found on Page 6 - Table 1
http://in3.dem.ist.utl.pt/master/stpolicy03/temas/tema6_1a.pdf
It shows a number of studies with private rates of return RANGING from 9 to 43% COUPLED with SOCIAL rates of Return raning from 10 to 160%
In the case of the deliberately misleading cherry picked point Mr Coochey chose the Social rate of return was 147%!
This is a deliberate attempt to be misleading by Mr Coochey and should be dismissed for the claptrap it is
Robert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
True that firms should invest in R&D if the returns are higher than interest rates - but only if all actors are fully rational act to maximise whatever it is they want to maximise. But the research on R&D tends to show that for most firms more (and better targetted) R&D would benefit them. This, along with the mass of research and the experience of our own lives, tends to show that people are not rational maximisers (homo economis does not exist). So, that interest rates are low is fairly much irrelevant…
Read morePeter Davies
Bio-refinery technology developer
The real problem is the focus on a single strategy (R&D tax concession) in isolation when a comprehensive and integrated strategy is actually required.
I know from following posts on this issue that some people are very disparaging of "anecdotal" evidence. Nonetheless I will offer some more here. Ourselves and many other small businesses in our area of interest with pre-commercial technologies do not benefit from R&D tax concessions, neither do we seem able to attract grant funding. Both are…
Read moreRobert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
Peter, this is an important issue that sits behind the R&D tax incentive issue. If R&D is important to Australia's future then building the capacity to support R&D across the board, including for small firms, is central. The current government cut the Commercial ready scheme, which filled part of the hole you are talking about. Overall, I feel that having an R&D policy that followed on from how and why R&D is actually done would help. But we seem to be following a path of ignoring reality and following some theory that tax drives innovation behaviour, and that lower corporate taxes cure all ills.
Not sure I believe this at all.
Peter Davies
Bio-refinery technology developer
Thanks Robert, When we looked at Commercial Ready it was explained to us the $100,000 grant offered was to pay for a Government endorsed consultant to prepare our IP for sale to a larger corporate...sort of assisting "business as usual" by finding small companies for the larger to feed on.
The thing that does not seem well understood is that for SME's R&D is first and foremost a growth strategy, it is to acquire more business. Providing a structure that allows them to do it more easily should…
Read moreRobert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
Great response. My personal feeling is that you are speaking a lot of sense. But policy in general has to deal with a lot of assumptions about the world, some of which are debatable. One that seems ot underpin R&D policy is that R&D is an ongoing activity done in corproate labs with investments based on solid ROI calculations. That much R&D is done for strategic purposes and many projects will fail is just not taken into account. Although as far as I am aware this is the case worldwide. The US has…
Read morePeter Davies
Bio-refinery technology developer
I agree with your comments on assumptions. We have seen some strange ones along the way.
Thank you for your good wishes but there are unlikely to be future dealings. We have wasted far too much of our time and limited resources beating our heads against walls. As they say "Those that can, do. The rest go to universities"
Like a few SME's of our acquaintance we are now planning on taking our innovation abilities and technology advances off shore. Another triumph for Australian policy makers.
Robert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
Sorry to here that you are planning to go offshore Peter. But then as a company you have to get a job done so that you can make money.
Read moreuniversities are not places where people can't do work. But the work they are rewarded in doing is completely different to a for-profit company. In fact often in universities helping companies will hurt your career - because you get rewarded for publications and publications, and research income - and publications. Companies don't want publications and do want things…
Peter Davies
Bio-refinery technology developer
Research institutional dysfunction is only part of the problem, Australian policy in our area of interest (clean energy) has become anti innovation.
The final straw for us was not being ignored whilst our competitors get multi million dollar grant offers to "develop" the technology we have already demonstrated (on the lawns of Parliament House no less)...or the fact that we are told directly by the team leaders of industry research flagships that "they know what we have achieved but are not allowed…
Read moreRobert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
Clean energy policy - Ohhh Yeah, that's an area of dysfunction. We led to world in PV technology, then all support got cut because of lobbying by the traditional producers (who wouldn't be hurt by PV). Across the board it's a mess. Sorry to hear what happened to you.
Cezar Trifoi
Technical Director
I would rather see the tax money spend subsidising Private R&D spend on Public R&D
Robert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
Cezar,
A common opinion, but I disagree. It is firms that generate the innovations that create more and better jobs, and that is the point of economic development policies, of which the R&D tax concession is a part. What is needed is a strong across the board R&D system, both public and private. Firms and public researchers tend to do different things - more D in companies and R in universities. When firms need to understand problems that are beyond them they often need either an academic expert of a hgihly experienced technical consultant.
But more public research does not equal more economic development, you need the firms to take it up and exploit it. This, of course, does not imply that current levels of public R&D are appropriate. But robbing Peter to pay Paulmisses the point of why we have R&D policies in the first place in my opinion.
stephen e Wilson+61(2) 0468580380
logged in via LinkedIn
Lets talk about R&D - implications
Consider why many Australian managed companies don't understand the benefits of R&D to their bottom line - not just the Taxation benefits.
In manufacturing there are two camps - innovators & imitators .
Survive and grow & remain on the right side of the ledger Australian companies MUST innovate ...indeed the country must innovate ..this where R&D Tax incentives etc from Government kick in .
ACTION of engaging in INNOVATION or improvement to the production…
Read moreRobert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
I agree Stephen. To me the concentration of policy on tax incentives and commercialisation of public research misses most of the game. Not that most other countries do much better. The big issue is getting managers that are real entrepreneurs - that is a difficult one. Studies (First Eleven) show the most successful Australian firms are conservative in approach. Which makes sense, a smaller market remote from the global centres. However, that is irrelevant if you want long term economci development and growth.
And the concept of cutting what schemes we have to reduce corporate tax seems remarkable. It will take 10-20 years to have a major impact, but when you need the capabilities in R&D and you don't have them it takes too long to develop without massive injections of money. And then you need the firms to take new things on. Hmm. Don't you love policy based on economics 101.
Robert Dalitz
Adjunct Fellow, Office of UWS Innovation at University of Western Sydney
I agree Stephen. To me the concentration of policy on tax incentives and commercialisation of public research misses most of the game. Not that most other countries do much better. The big issue is getting managers that are real entrepreneurs - that is a difficult one. Studies (First Eleven) show the most successful Australian firms are conservative in approach. Which makes sense, a smaller market remote from the global centres. However, that is irrelevant if you want long term economci development and growth.
And the concept of cutting what schemes we have to reduce corporate tax seems remarkable. It will take 10-20 years to have a major impact, but when you need the capabilities in R&D and you don't have them it takes too long to develop without massive injections of money. And then you need the firms to take new things on. Hmm. Don't you love policy based on economics 101.