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Efficiency of tax incentives - February 2016

Our first poll of the ESA National Economic Panel (NEP) for 2016 was inspired by the innovation agenda that has - since PM Turnbull came into power late last year - been propelled into the limelight and is fast becoming embedded in popular public/economic/policy discourse. 

In the spirit of 'agility', we 'disrupted' our panellists and used our polling platform to 'crowd-source' their opinions on a key policy lever designed to stimulate innovation - tax incentives. 

Specifically, the panel was polled on the following - 

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

Read the ESA-Monash Forum press release:

Please continue the discussion by sharing the results/commentary/press release via the social media buttons on each page or through your own networks.

Thanks again to the panellists and to Professor Beth Webster. 

Overview of this month's poll results by Professor Beth Webster

Views were balanced on whether the Australian Government proposed special tax breaks for investments in tech businesses would be efficient or not, with 12 agreeing they were inefficient; 9 believing they would be efficient and 8 uncertain.

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Poll responses

Responses graph

Weighted responses


Responses (29)


 

Peter Abelson

Uncertain (neither agree nor disagree)

5

In my view, the incentives are likely to induce only small changes in behaviour, innovation or investment (as innovators and investors in this space are not seeking marginal gains) and the concessions could be rorted. However a tick for a culture shift to encourage new business over old.


 

Harry Bloch

Strongly disagree

10

The statement that "the incentives are likely to be inefficient" is purely ideological. The standard theory of the efficiency of the allocation of scarce resources among competing assumes market mechanisms that are well informed and competitive. Investments in technology and start-up businesses are plagued with fundamental uncertainty, asymmetric information, moral hazard and underdeveloped markets. Thus, the standard theory provides no scientific basis for assessing the efficiency of tax incentives for such investments.


 

Jeff Borland

No opinion

10

Not a topic I have ever considered or have the background to answer.


 

David Butler

Disagree

6


 

Matthew Butlin

Uncertain (neither agree nor disagree)

7

The answer depends on the design of the incentive, the stage of the business and the other necessary elements for successful start ups. The availability of finance, access to technical skills and capacity, level of managerial capability, access to markets and the profitability of the business are all critical considerations. A policy based solely on tax incentives is likely to be far less successful (and hence inefficient) if it does not also address these other elements.


 

Fabrizio Carmignani

Disagree

9

Tax incentives are not necessarily inefficient; hence my disagreement with the statement. Obviously, depending on how incentives are designed and implemented, they might be inefficient. This is particularly the case when the government uses selected incentives to pick winners ex-ante and/or when incentives are not linked to some form of performance assessment based on clear and transparent benchmarks. So, in my view, the point is not whether tax incentives are efficient or inefficient in absolute terms, but rather how they are designed and what kind of governance mechanisms are established to support their implementation.


 

Bruce Chapman

Agree

6


 

Deborah Cobb-Clark2

Agree

8


 

Lin Crase

Agree

9


 

Kevin Davis

Agree

5

Very hard to give a confident response without full details of actual conditions. Past experience with film investment tax concession schemes (although somewhat different) suggests more funding, but of lower quality ventures.


 

Brian Dollery

Strongly agree

9


 

Uwe Dulleck

Disagree

8

I do believe that the climate towards innovation is not the best in Australia. Such a bias can be seen as an externality on the business. A tax incentive could be a way to offset this bias. In this sense, I see that such incentives may increase efficiency in the way the Australian economy operates. The big challenge is how to define the technologies and businesses that merit the tax break.


 

Mardi Dungey

Strongly agree

9

The proposals given thus far have been marketed as aiming for investment directed to employment producing activities, thus potentially crowding out alternatives which may not be as labour intensive. This is a social as well as economic question.


 

Saul Eslake

Disagree

3


 

Allan Fels

Agree

7


 

Gigi Foster

Strongly agree

8

Complex tax laws are an open invitation to taxpayers to find creative ways to gain from special concessions or complicated loopholes, because a law's complexity increases the difficulty faced by government in monitoring compliance. 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. Far better to support innovation through more direct and more efficient means, such as direct competitive grant programs and other tournaments, subsidized job fairs and other contact-making events, and wise investments into the basic infrastructure and higher education that are inputs into innovation.


 

Stephen King

Uncertain (neither agree nor disagree)

5

This is difficult to evaluate without a lot more investigation. The package has targeted tax offsets and a capital gain tax exemption on relatively small investments in start ups, as well as offsets for (much larger) venture capital investments. There is also a change to the 'same business test' for carry forward losses. The economic question is: where is the market failure? It could be argued that individual investors are too risk averse from a social perspective and that socially it is desirable to have a greater level of individual risk taking (e.g. individuals can do 'one draw' on a risky investment but society as a whole gets lots of 'draws'). If so, 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?) So I will sit on the fence!


 

Geoffrey Kingston

Agree

4

Tax breaks targeted at specific industries or business structures are attempts by governments to pick winners. Low business taxes are efficient, but should be across the board.


 

Michael Knox

Disagree

8

These tax incentive have the objective of constructing an entirely new industry in Australia. Start Up Funds only exit now in tiny enclaves and only in Sydney.We need to build a new area of financial intermediation in this sector from the ground up. The incentives appear to be aimed at building a broad base of participation in funding start ups and an increased pool of expertise as well as an increased volume of start up funds.


 

Rodney Maddock

Uncertain (neither agree nor disagree)

10

The government is trying to effect a cultural change in views about how Australia might develop. If people buy into the new values then the incentives will work reasonably. The incentives are part of the attempt to change the mindset. I suspect people have been looking for a new, positive narrative about economic growth after the mineral boom so there is some chance of success. If there is no change of mindset and values, the money will be wasted.


 

Tony Makin

Disagree

7

Tax incentives to promote innovation can be justified as a form of industry assistance on market failure grounds. Technological improvement is also a key driver of economic growth. However, there is a risk that tax incentives will be 'hit and miss', resulting in a degree of government failure. The cost of the initiative should be fully offset by cuts to less efficient forms of industry assistance.


 

Flavio Menezes

Uncertain (neither agree nor disagree)

10

The conventional wisdom that tax breaks, such as reductions in the capital gains tax for investors in innovative start-ups, distort behaviour and are inefficient is not necessarily the complete story. Problems of asymmetric information are pervasive in start-ups and have implications for tax policy. For example, consider the case where entrepreneurs' efforts towards developing a new idea or product are not (fully) verifiable. Similarly, venture capitalists' managerial efforts may not be observable either. (See, for example, Keuchnigg and Nielsen, Journal of Public Economics, 2004). This can create moral hazard with both parties undersupplying effort, with negative impact on innovation. In this context, a capital gain tax can be particularly harmful as it further reduces incentives for entrepreneurs and venture capitalist to provide effort. Thus, reducing the capital gains tax may increase welfare, compared to the status-quo. However, there may better policies so in this sense CGT exemptions are not 'efficient'.


 

James Morley

Strongly agree

10

These incentives will lead to more investment in projects with lower rates of return rather than projects with "public good" spillovers such as produced by basic research.


 

Margaret Nowak

Uncertain (neither agree nor disagree)

9

Investors in technology and innovation businesses are subject to a higher degree of information failure/uncertainty in returns than is generally the case for other businesses, and potentially market failure in access to capital. However, the design of tax incentives that appropriately address this issue without creating other distortions is problematic.


 

John Piggott

Disagree

7

A lot depends on how efficiency is defined in the context of risky innovation. At a modest scale, support for start-ups may well yield success stories that will more than compensate for the public investment involved.


 

Rana Roy

Agree

7

I agree – with regret. In principle, there is a clear case for intervention to support innovation if, and insofar as, social returns are greater than private returns. And there is much to be welcomed in the Government's Innovation Statement, including the more conventional measures on CSIRO funding, science education, and so on. But in order for an intervention to be "efficient" (i.e., welfare-positive), it must first be "effective": in the present case, it must generate a measurably higher level of innovation that would otherwise obtain. Taken in isolation, the "new tax incentives for investments in technology and innovation businesses and start-ups" are likely to be too limited to be effective: i.e., too limited in size and scope relative to the incentives that the tax system currently provides for investments in all manner of non-innovative, unproductive and welfare-negative activity, including especially in real estate. Arguably, therefore, the best way for Australia to encourage investment in technology and innovation would be to withdraw the current tax incentives to keep bidding up the prices of "little boxes made of ticky-tacky … little boxes all the same".


 

Jeffrey Sheen

Disagree

6


 

Hugh Sibly

Uncertain (neither agree nor disagree)

8


 

Joaquin Vespignani

Agree

6