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Extra tax credit, extra R&D? Vienna 2006-04-24 Extra tax credit, extra R&D? Maarten Cornet & Björn Vroomen CPB.

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Presentation on theme: "Extra tax credit, extra R&D? Vienna 2006-04-24 Extra tax credit, extra R&D? Maarten Cornet & Björn Vroomen CPB."— Presentation transcript:

1 Extra tax credit, extra R&D? Vienna 2006-04-24 Extra tax credit, extra R&D? Maarten Cornet (m.f.cornet@cpb.nl) & Björn Vroomen (b.l.k.vroomen@cpb.nl) CPB Netherlands Bureau of Economic Policy Analysis New Frontiers in Evaluation Vienna, 24 April 2006 (Work in Progress)

2 Extra tax credit, extra R&D? Vienna 2006-04-24 Outline Introduction Methodology Cases ► starter programme ► extension first tax-credit bracket Added value Discussion

3 Extra tax credit, extra R&D? Vienna 2006-04-24 Introduction R&D tax-credit programme ► ‘simple’ tool ► reference point for more complex programmes Are R&D-support programmes effective? ► identification causal relation ► literature not convincing Analysis of (changes in) policy with social experiment framework ► We present two examples

4 Extra tax credit, extra R&D? Vienna 2006-04-24 The ‘WBSO’ WBSO: Dutch R&D tax credit programme ► ‘Simple’ tool ► Reduction of total wage costs (including R&D) ► Credit is only based on R&D-employment (total R&D- wage costs) ► 40% tax credit for the first € 68k, 13% for the remaining R&D-wage costs€ 68K € 0 40 %13 %

5 Extra tax credit, extra R&D? Vienna 2006-04-24 Effective? Effectiveness of innovation support programmes in general unclear Causality or correlation? ► WBSO↑ → S&O↑ or S&O↑ → WBSO↑? Identifying a causal relation between instrument and outcome is far from trivial We use social experiment

6 Extra tax credit, extra R&D? Vienna 2006-04-24 Social experiment Identify two groups; experimental & control ► similar participants in that manner that the difference in outcome can only be explained by the treatment Participants are not randomly assigned and aware of being treated! Use characteristics of ‘experiment’ (policy) to identify both groups

7 Extra tax credit, extra R&D? Vienna 2006-04-24 Data Data provided by ► Dutch Tax and Customs Administration ► SenterNovem (Ministry of Economic Affairs, programme administrator) Data provided on participants in the WBSO- programme ► total yearly R&D wages ► firm characteristics (branch, turnover, total wages) ► period 1994-2003 (focus on 2000-2001) ► 28000+ records

8 Extra tax credit, extra R&D? Vienna 2006-04-24 Estimators Difference-in-Difference estimator (DD): compare group averages over time ► corrects time specific effects ► corrects group specific effects First-Difference estimator (FD): compare growth/change of individual participants over time ► corrects time specific effects ► corrects firm specific effects

9 Extra tax credit, extra R&D? Vienna 2006-04-24 Changes WBSO 2001 Starter programme ► additional support for new R&D-firms (starters) ► ‘goal directed’ programme Extension of the first tax-credit bracket ► €68K -> €90K ► ‘general’ programme Starters benefit from both programs

10 Extra tax credit, extra R&D? Vienna 2006-04-24 Starter programme R&D-wage costs 13 % 60 % 90.756 40 % - Credit - starter no starter - - Extra 20% credit for R&D-wage costs till 90K

11 Extra tax credit, extra R&D? Vienna 2006-04-24 Identification starters ‘younger’ than 5 years max three years of starter funding ‘Age’ WBSO experience 012345 0SSSSSNRS 1.SSSS 2..SSS 3... 4....NS 5..... S=starter, NRS=near starter; NS=non starter

12 Extra tax credit, extra R&D? Vienna 2006-04-24 Ideal case? Nearly ideal ► Difference in age may influence reaction of firms ► Difference in experience with the WBSO program (that is, experience with R&D) may influence reaction of firms Include control variables ► age and WBSO experience ► firm characteristics

13 Extra tax credit, extra R&D? Vienna 2006-04-24 Effect ? Effect of policy on R&D wage expenditures is estimated between 10% and 20% Starter vs near-starter ► difference-in-difference estimator: 18% (p=0.00) ► first-difference estimator: 14% (p=0.00) Starter vs ‘hidden’ starter ► FD-estimator: 11% (p=0.01)

14 Extra tax credit, extra R&D? Vienna 2006-04-24 Extension first tax-credit bracket Increase upper bound from € 68k to € 90k R&D-wage costs 13 % 90.756 40 % - Credit 2001 till 2000 68.067 - - -

15 Extra tax credit, extra R&D? Vienna 2006-04-24 Control & Experimental group Control group 1, firms below € 68k: ► no change, credit remains 40% Experimental group, firms between € 68k and € 90k: ► increase credit of 13% to 40% Control group 2, firms above € 90k: ► no change, remains 40% & 13%, however lump sum subsidy

16 Extra tax credit, extra R&D? Vienna 2006-04-24 Methodological issues Firms in ‘control’ group can also be influenced by treatment ► difference in effect is estimated Choice of group sizes can influence results Group membership is not constant over time  No convincing causal relation! ► Let’s ignore problems for now

17 Extra tax credit, extra R&D? Vienna 2006-04-24 Effect ? (ignoring methodological issues) Compare 50k-68k with 68k-90k ► DD-estimator: 2.6% increase (p=0.01) ► FD-estimator: 0% (1.7 ns) Compare 90k-120k with 68k-90k ► DD-estimator: 2.9% increase (p=0.01) ► FD-estimator: 0% (0.6 ns) DD +, FD ?  group composition effect? ► entrants cause effect?

18 Extra tax credit, extra R&D? Vienna 2006-04-24 Value for money Bang-for-the-buck (BFTB) ► Ratio between extra R&D and extra public funding ► BFTB defined in wage costs not total R&D Possible other definitions ► total R&D expenditures ► number of innovations ► number of innovation hours ► turnover ► social benefits

19 Extra tax credit, extra R&D? Vienna 2006-04-24 BFTB Starter programme ► Effect estimated between 10% and 20% ► BFTB between 0.5 and 0.9 Extension first tax-credit bracket ► Effect estimated ? between 0% and 3% ► BFTB between 0 and 0.15 ► Extra funding firms above 90k is quite costly –lump sum (€ 6000)  minimal effect expected –in 2000: 1932 firms near € 12 million

20 Extra tax credit, extra R&D? Vienna 2006-04-24 Summary Starter programme: ► successful, clear causal relation ► effect 10% - 20% increase R&D wage costs ► BFTB 0.5 - 0.9 Extension first tax-credit bracket: ► unclear, methodological issues that hinder identification causal relation ► effect ? 3% increase R&D wage costs ► BFTB 0 - 0.15 ► lump sum is costly

21 Extra tax credit, extra R&D? Vienna 2006-04-24 Concluding remarks Simple tool, however evaluation not trivial ► changes in policy useful for evaluation Starter programme more cost-effective than extension bracket ► extensive cost-benefit analysis necessary Literature: on average BFTB 1 ► total WBSO: 1.02 ► starter: BFTB 0.5 - 0.9 ► extension bracket: BFTB 0 - 0.15

22 Extra tax credit, extra R&D? Vienna 2006-04-24 WBSO 1994-2003

23 Extra tax credit, extra R&D? Vienna 2006-04-24 WBSO entry 1994-2003

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