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R&D tax farce

20 April 2018

I have long advocated for tax credits for R&D spending in New Zealand.

Successive governments have touted this country's ability to come up with innovative new technologies and turn them into world-leading products.

Yet... we get virtually no support for this "groundbreaking" work.

Well no, that's not strictly true... it's far worse than that.

Successive governments have been in the business of picking winners (and failing) through a raft of schemes such as technology grants, the Callaghan Innovation fund and other ludicrous mechanisms.

The reasons that picking winners and grants doesn't work is because it makes no sense to tax companies A and B then give that money to company C when all may be working on exactly the same technology. For every company that is advantaged by a grant, many others are disadvantaged and the government has proven time and time again that is utterly inept at deciding which company is most likely to succeed -- and thus gets the benefit of those grants.

So now Labour's giving it another go -- by way of tax credits -- but they've also got it utterly wrong and I'll explain why.

Firstly, the tax credits are paltry -- too small in fact to even warrant doing the paperwork.

A 12.5% credit is a nonsense amount and will make bugger-all difference to any of the real powerhouses of innovation.

The other big mistake is allowing these credits to apply only to companies which are spending at least $100K per year on R&D.

I thought we were proud of our "kiwi in a shed" reputation?

What about the little guy, working on a shoestring who, if properly supported, can come up with world-changing technologies?

Hamilton Jet? The electric fence?

I suspect that these are ventures that would never have qualified for the recently announced tax credits -- whilst hundreds of other well-established companies with very healthy and positive cashflows that allow them to fully-fund their own R&D activities without the help of taxpayers could net as much as $15 million each from the taxpayers' purse.

The ridiculous aspect of this is that in reality, allowing the little guy to claim a tax credit for his R&D spend would likely cost the taxpayer virtually nothing -- because the vast majority of small start-ups will fail and thus never make a profit against which those credits could be applied.

That's the beauty of helping small startups by way of the tax credit system. The drain on taxpayers' pockets is very, very low.

However, when you offer these credits to large multinationals or the likes of F&P, who already have the resources to fund their own R&D activities, the drain on the taxpayers' pockets can be very significant indeed -- with little chance of having any significant effect on the outcomes from those companies.

Surely, as a nation which prides itself on the tenacity and cleverness of those hard-working individuals, toiling away with the bare minimum of capital and resources, these are the enterprises we should be backing -- not ignoring.

Instead of funding huge, already successful businesses or trying to pick winners, we should be creating an environment where everyone is supported but only those who succeed actually get the money which comes from tax credits. All those who fail and fall by the wayside in their attempts to develop new technologies will be a zero-cost to the taxpayer -- but those who succeed and turn their ideas into a profitable enterprise will get the fiscal support they so richly deserve -- because they are creating jobs, export earnings and wealth for the entire country.

Sadly, this latest proposal seems to be driven by the lobbying of those large entities which stand to benefit most from it -- not the little guys who will once again be disadvantaged.

I am disappointed... but not surprised.

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