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Corporate research and development beyond the reach of even the federal Innovation Minister
IPA REVIEW ARTICLE
Innovation, Industry, Science and Research Minister Kim Carr has promised that the Labor government will ‘review' the R&D tax concessions. One of the early decisions of the Howard government was to reduce the 150 per cent R&D concession to 125 per cent. The public science lobby was shocked, and has campaigned relentlessly over the past 11 years to restore the concession to its former glory.
The 150 per cent tax concession for R&D was introduced in 1985. In that year business expenditure on R&D was 0.38 per cent of GDP. By 1996, when the concession was reduced to 125 per cent, that expenditure had increased to 0.86 per cent of GDP.
The evidence in favour of the tax concession is that business expenditure on R&D declined after 1995-96, falling to 0.65 per cent of GDP by 1999-00. But this is an incomplete picture. There was a huge increase in expenditure in the early 1990s-it appears that there was in those years an Australian ‘R&D bubble'. Also there was the dot-com boom in the late 1990s where Australia was pilloried as an ‘old-style' economy. In short, the decline in R&D expenditure to GDP following 1996 provides no definitive support for, or against, the tax concession.
We need to consider is the value of the tax concession itself. This is a function of two factors: first the size of the concession, which we know has fallen.
Second, the corporate tax rate has fallen from 49 per cent in 1986 to 30 per cent today. These two factors combine to generate the after-tax cost of R&D to the firm. This cost has changed dramatically since the late 1980s, mostly because the corporate tax rate has declined. The change due to the tax concession itself is quite small. If government wanted to restore the after-tax cost of R&D to 1986 levels, while maintaining the current corporate tax rate, the concession would have to rise to 245 per cent. Nobody is suggesting a tax concession this large. So rather than fiddle around with the tax code, governments should consider other strategies to encourage corporate spending on research and development-or whether governments should even try to be involved at all.