Tax breaks aren't the way to grow

Business is tipping a record $8.4 billion a year into research and development, and investment is soaring in the wake of the federal Government's 2001 tax changes, according to a cheery Industry, Tourism and Resources Minister Ian Macfarlane.

However, the number of Porsches in university car parks doesn't seem to reflect this shower of gold in the research community. It is timely to subject the whole theory of the R&D tax break to closer scrutiny and ask exactly what taxpayers get for so big an investment.

The Government justifies tax breaks for R&D thus: "In a functioning free market, firms invest in less research and development than is optimal for the economy. Firms only invest in R&D to assist their bottom line, not to benefit others. However, many firms can use the same knowledge that spills over from others' R&D without reducing its value."

Apart from the tenuous logic, this highlights that the obstacle to the dissemination of research results is communication. Throwing billions of tax dollars at a few companies in the vague hope their intellectual property will propagate to other companies seems fairly dubious.

The stated primary aim of the tax break is to encourage the development of innovative products, processes and services. However, Australia has had a substantial R&D concession for nearly 25 years and no one has reported what new products, processes or services it has yielded. All we get are hopeful tax statistics. These, for the record, show that in 2003-04 (the latest year covered by the minister's study) 5,630 companies received $6.936 billion in tax concessions, ostensibly for R&D.

Neither the universities nor CSIRO are reporting billions in new external revenues and, since they employ the bulk of researchers, one has to wonder where it is all going.

Second, while 5,630 companies doing research sounds encouraging, it is less than 1 per cent of all the enterprises in Australia and only increasing by 200 to 300 a year. Third, our hi-tech trade deficit appears to be growing rather than shrinking, so whatever the R&D tax break is achieving, it isn't a wild surge in technology exports.

Our ICT trade gap, for example, increased 50 per cent in four years, from $14 billion in 2003 to $21 billion in 2007.

When these and other factors are considered, there is little proof that tax breaks result in more genuine R&D or in more innovative products and exports. A private company that invested $8 billion a year on such a flimsy basis would be taken to task by shareholders.

Australia modelled its R&D tax formula on those of three countries - Britain, Canada and Ireland - evidently assuming that if they think it works, then it must work.

However, this overlooks the pragmatic character of Aussies who, when they see a tax break, tend to interpret it as a chance to cut tax rather than to do research. This is not to malign the many genuine users of the tax concession, but it is to suggest we are getting far fewer commercial R&D outcomes for our $8 billion annual investment than we ought.

Until this - or any - government can quantify the commercial outcomes that flow from deductible research, Australia has no way of knowing whether tax breaks work.