Taxation And Innovation

Taxation And Innovation

Innovation is the cornerstone of sustained economic growth and prosperity. In a globalised world, innovation is a key driver of competitiveness between businesses and it plays a critical role in the rapid growth of emerging economies. At the same time, the global financial crisis has increased the relevance of a better understanding of the role that innovation can play in restoring sustainable growth while giving focus to the issue of constrained public resources and effective public expenditure. Especially in the current context of a global financial and economic downturn, it is particularly important that tax policies continue to provide efficient incentives to fostering innovation.

For the purposes of this paper, ‘innovation’ refers to ways to transform an idea into a new, improved product, service or process, leading to increased profits and/or reduced costs. The Oslo Manual (OECD (1996)) for measuring innovation identifies four types of innovation. Product innovation involves a good or service that is new or significantly improved. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics. Process innovation involves a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software. Marketing innovation involves a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. Organisational innovation involves introducing a new organizational method in the firm’s business practices, workplace organization or external relations.

Today’s world is one in which both OECD countries and non-OECD economies increasingly rely on knowledge and services to drive their performance, where investment in intangible assets is vital and where governments look to innovation-induced growth as a spark for re-igniting growth. Governments provide support for the creation and the dissemination of innovation through a variety of channels with the aim to create a conducive policy environment (regulatory policy, sound tax and financial system). Tax policies must form part of a coherent and well-designed innovation strategy that takes account of the interactions and complementarities between its different key drivers and increases overall long term and sustainable growth.

Policy makers are encouraged to assess and design the tax policies to support specific economic objectives and efforts reflecting the current foundation of economic growth to stimulate the economy, especially the creation and the dissemination of knowledge. Scientific and technological innovations enable modern economies to improve competitiveness and productivity, giving us the means to achieve a higher standard of living and better quality of life, to preserve the quality of our environment and to improve our health, enhance public safety and security, and manage our natural and energy resources.

This paper identifies and discusses the linkages between tax and innovation, focusing on its key drivers. Factors that have an impact on innovation, either directly or indirectly, and at the same time may be influenced by tax policies are the following:

1. undertaking R&D investments, the creation of intangible assets and adoption of knowledge (either through the self-development, the purchase or licensing of intellectual property and knowledge);
2. greening of the economy;
3. risk-taking with respect to the creation of newly innovative businesses and venture start-ups; encouraging cooperation and partnerships between private sector firms and research centres;
4. encouraging the mobility of high skilled workers, including the education and the training of the work force.