TAX INCENTIVES FOR INNOVATION: SOME ISSUES OF POLICY IMPLEMENTATION AND EVALUATION OF EFFECTIVENESS

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TAX INCENTIVES FOR INNOVATION: SOME ISSUES OF POLICY IMPLEMENTATION AND EVALUATION OF EFFECTIVENESS

Journal Title: VADYBA - Year 2013, Vol 23, Issue 2

Abstract

The article explores the role of tax incentives in the promotion of the development of innovation by enterprises. Particular attention is paid to the merits and drawbacks of tax incentives, its comparison with financial incentives and to various approaches to evaluate their effectiveness. Tax incentives for innovative development are widespread throughout the world. Although in some states the fiscal incentives are not used, a long discussion about their possible introduction in the future has been held. Unlike financial incentives for innovative development, tax incentives are usually more market oriented, are available to a vast majority of enterprises and have relatively inexpensive administration. They provide entrepreneurs with the opportunity to make their own decisions about the most suitable way of using tax allowances and tax credits. However, fiscal incentives are difficult to apply exclusively to the specific sectors of the national economy that could be of vital importance to macroeconomic development. In addition, the amount of uncollected taxes resulting from more a favourable regime for innovative enterprises can not be predicted. Tax incentives are extensively used by both federal and local governments. Sometimes more favourable tax regime in one of the states can motivate enterprises located in other states of the same country to consider changing their domicile. Traditionally, the most significant benefits from fiscal incentives are gained by large enterprises which make substantial profits. Thus, tax incentive is an ineffective instrument for the support of those enterprises which operate at a loss or whose pre-tax profit is relatively small. In recent years, the tendency towards simplifying the structure of fiscal incentive schemes and increasing their generosity has been observed in numerous countries. The evaluation of tax incentive effectiveness is an important aspect of modern macroeconomic policy. The single method of evaluation has not been developed thus far due to differences in such factors as national business environment, culture and economic policies. Nevertheless, the necessity to apply a “cost-benefit” approach to assessment is widely recognised by numerous studies. In practice, the limited availability of required data has led to the exploration of direct additionality. Ideally, the behavioural additionally should also be taken into account as it makes fundamental changes in enterprise attitude to innovation strategy, scientific and technological process, cooperation with other institutions and development of human capital. Tax incentives are believed to have a positive impact on the sales and range of innovative products. It has been proven that the reaction of enterprises to fiscal incentives is more explicit in the long term because of the inability of enterprises to change rapidly the model of financing innovations if the state programme of fiscal incentives has been launched. Moreover, enterprises are currently reacting more strongly than they were a decade ago. The impact of fiscal incentives on SMEs is found to be more considerable than it is on large enterprises. The tremendous efforts made by EU institutions towards improving the methodology for evaluating fiscal incentives have resulted in guidelines for better quality and comparability of assessments. Forward planning, clearly formulated goals, unlimited access to statistical information, integrated analysis of additionality, a good variety of appropriate assessment methods and evaluation independence could be mentioned as examples of these recommendations.

Authors and Affiliations

Artūrs Prauliņš

Keywords

EP ID EP306141
DOI -
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