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Extra tax credit, extra R&D?. Maarten Cornet ([email protected]) & Björn Vroomen ([email protected]) CPB Netherlands Bureau of Economic Policy Analysis New Frontiers in Evaluation Vienna, 24 April 2006 (Work in Progress). Outline. Introduction Methodology Cases starter programme - PowerPoint PPT Presentation
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Extra tax credit, extra R&D?
Maarten Cornet ([email protected])&
Björn Vroomen ([email protected])
CPB Netherlands Bureau of Economic Policy Analysis
New Frontiers in EvaluationVienna, 24 April 2006
(Work in Progress)
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Outline
Introduction
Methodology
Cases► starter programme► extension first tax-credit bracket
Added value
Discussion
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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
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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 %
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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
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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
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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
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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
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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
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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
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Identification starters
‘younger’ than 5 years max three years of starter funding
‘Age’
WBSO experience
0 1 2 3 4 5
0 S S S S S NRS
1 . S S S S NRS
2 . . S S S NRS
3 . . . NRS NRS NRS
4 . . . . NS NS
5 . . . . . NS
S=starter, NRS=near starter; NS=non starter
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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
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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)
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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
-
-
-
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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
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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
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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?
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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
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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
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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
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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
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WBSO 1994-2003
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WBSO entry 1994-2003
