An International Comparison of Tax Assistance for Research and Development: Estimates and Policy Implication

Abstract

Business spending on research and development (RD but, it is difficult to design a program that can be completely restricted to young firms since entrepreneurs would have an incentive to create new firms to avoid losing higher benefits. Even with this “leakage”, however, an age-dependent incentive could be more cost-effective than size-dependent enhanced benefits. There is a particularly strong case for providing refundability to young firms, which are unlikely to have taxable income while the first round of R&D is undertaken While refundability for large firms has the advantage of increasing the effective subsidy rate on R&D to its target level, it runs the risk of revenue losses as multinational firms have less incentive to ‘book’ taxable income in Canada. A reasonable compromise would be to adjust the value of unused credits and deductions to maintain their present value. International comparisons of tax assistance for R&D typically highlight country rankings and express satisfaction with the most generous regimes. This paper draws attention to the possibility of providing too much of a good thing, a warning that governments in Canada should keep in mind when preparing next year’s budgets.