News story 4th Feb 2016

Are tax incentives for investment in technology and innovation inefficient?

Australian economists are divided on the question whether tax incentives for investment in technology and innovation are efficient, recent results from a poll undertaken by the ESA-Monash Forum have shown.

Panellists were asked to respond to the following statement:

New tax incentives for investments in technology and innovation business and start-ups are likely to be inefficient

Out of 29 respondents, 12 agreed that such incentives are inefficient, while 9 disagreed with the statement and 8 were uncertain.

Innovation

Gigi Foster, Associate Professor at UNSW's School of Economics, strongly agreed with the statement. Her main concern is opening the tax system to yet more loopholes.

"Taxes make up a big chunk of gross earnings, so the incentives for taxpayers to find ways of violating the spirit of the law but not the letter are also high. For these reasons, the waste generated by the present proposal - in terms of government support for bad projects and taxpayer resources spent on creative tax accountants - would likely be significant," she said.

In her opinion, it would be far better to support innovation through more direct and efficient means, such as competitive grant programs for example.

Professor Harry Bloch, John Curtin Distinguished Emeritus Professor (Curtin University), strongly disagreed with the statement. He argues that standard economic theory cannot be used to judge the efficiency of such policies.

"Investments in technology and start-up businesses are plagued with fundamental uncertainty, asymmetric information, moral hazard, and underdeveloped markets. Therefore, the standard theory provides no scientific basis for assessing the efficiency of tax incentives for such investments," he concluded.

Monash Business School Professor Stephen King was uncertain about the statement, indicating that it's difficult to evaluate without a lot more investigation.

"It might be desirable to have well-targeted incentives for risky investment. However, are these changes well-targeted? And do they address the key problem (e.g. is it bankruptcy laws that are the problem rather than access to capital)?"

Other panel members indicated that the efficiency of these incentives would very much depend on how the tax breaks are designed.

Professor Beth Webster, who wrote the overview for this month's panel results, concluded that the diversity of views presented by the panel members highlights a lack of theory in the area of innovation economics. In addition, she said that Australian economics clearly need additional knowledge about relevant empirical studies.

For the complete panel results, please visit the ESA Monash Forum pages

The ESA Monash Forum is a joint initiative between Monash Business School and the Economics Society of Australia (ESA). It is designed to explore the extent to which Australian economists agree or disagree on key national and global public policy issues.