Taxation and Innovation: How R&D Tax Credit Schemes Foster Innovation in the Private Sector


Oliver Falck, Anna Kerkhof, Christian Pfaffl

Innovations form the backbone of sustained economic growth and, as such, they play a key role in safeguarding prosperity. Governments, aware of this, invest heavily in public research at universities and research institutes, and strive to create ideal conditions for private sector research and development (R&D), usually through specific R&D tax credit schemes or direct funding.

Key Messages

  • Research and Development (R&D) is crucial to secure continued economic growth and prosperity
  • Private sector investments in R&D are typically too low, which constitutes a market failure
  • Governments use R&D tax credit schemes to compensate for this failure
  • Input-based tax credit schemes and lenient corporate taxation are especially useful to stimulate private sector R&D activities

Oliver Falck, Anna Kerkhof and Christian Pfaffl: Taxation and Innovation: “How R&D Tax Credit Schemes Foster Innovation in the Private Sector,” EconPol Forum 24 (4), CESifo, Munich, 2023.