Distortions in R&D support worsened by federal budget

CALGARY, July 12, 2012 /CNW/ - In a report published today by The School of Public Policy, author Ken McKenzie argues that Budget 2012 was a step in the wrong direction when it comes to supporting Research and Development in Canada.

His report contrasts effective subsidy rates for R&D activities pre- and post-Budget 2012 and finds a series of troubling distortions.

"The proliferation and variation in effective subsidy rates for R&D offered through the tax system is distortionary, inefficient and lowers the overall efficacy of government support for R&D in Canada," he writes.

Specifically, McKenzie argues that the changes found in Budget 2012 amplify favouritism towards smaller businesses versus large corporations without any body of evidence indicating that this is advantageous to the economy. His analysis shows that, pre-budget, the subsidy rate for small corporations was 1.47 times larger than that for large corporations, but this ratio increased to 1.72 post-budget.

McKenzie also questions the bias towards labour-intensive R&D versus capital-intensive R&D. He argues that the variation in subsidy rates across business inputs distorts firms' production decisions and unjustifiably favours firms with higher labour-intensive R&D.

While the federal government scaled back its support for R&D in Budget 2012, McKenzie argues that "a better approach would have been to lower the overall subsidy rate across the board."

The report can be found at www.policyschool.ucalgary.ca/publications

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