R&D tax incentives

Tax incentives are widely used to incentivize firms to engage in research and development or to increase their R&D efforts. They can be volume-based or incremental. More and more countries have also adopted the patent box, which is an ex-post tax reward for successful innovators. Two broad methods are used in evaluating the effectiveness of tax incentives: the price elasticity of a user cost of R&D and counterfactual methods. In evaluating tax incentives a major question is whether there is crowding in or crowding out. More thorough evaluations do a cost-benefit analysis incorporating R&D spillover, the cost of financing tax expenditure, as well as administrative and compliance costs in the computation of the bang for the buck. Some studies look beyond the effect on R&D at the effect on innovation and productivity. R&D tax incentives are in principle neutral, but they are sometimes used to stimulate a particular type of R&D. They can also give rise to tax competition to attract R&D performers.