A Framework for Evaluating Provincial R&D Tax Subsidies

Bev Dahlby ()

Canadian Public Policy, 2005, vol. 31, issue 1, 45-58

Abstract: The spillover effects from a firm's research and development (R&D) activities provide a rationale for R&D tax incentives. This paper provides a framework for incorporating the external rate of return on R&D, the tax sensitivity of R&D spending, and the government's marginal cost of public funds in the evaluation of provincial R&D incentive programs. Using this framework, we find that an additional dollar of tax incentive has to generate close to $2.00 of additional R&D and the external rate of return has to be very close to 30 percent in order to justify a provincial tax subsidy for R&D if the provincial government's marginal cost of funds is $1.40.

Date: 2005
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