R&D Tax Credits and the German 3.5 Percent Objective

Tasks

The governing parties in Germany have stated the objective to raise total spending on research and development (R&D) to 3.5 percent of German gross domestic product (GDP) until 2025. However, in light of the absolute as well as the relative importance of private R&D spending, a significant increase in private R&D spending is required to reach this goal. This study analyses whether introducing tax credits to incentivize private R&D spending can contribute to achieving the government’s ambitious objective.

Methods

The study starts by summarising the economic arguments in favour of R&D tax credits, before taking stock of the most common international practices, as well as documenting the role played by tax credits around the globe. At last, the study reviews the existing empirical evidence on the effectiveness of R&D tax credits in terms of increasing private R&D spending and discusses whether they are a suitable instrument to meet the German government’s objective.

Data and other sources

In its main part, the study provides a review of the extant literature on R&D tax credits. In addition, descriptive analyses are conducted based on data from OECD.

Results

From an economics perspective, the introduction of R&D tax credits in Germany seems advisable. R&D tax credits have some advantages vis-à-vis a project-based promotion of R&D. Moreover, the existing empirical evidence suggests that R&D tax credits are highly effective in increasing private R&D spending. All in all, the German govern-ment’s objective to increase R&D spending to 3.5 percent of GDP only appears to be achievable if R&D tax credits are adopted.