An independent think tank dedicated to economic progress in Atlantic Canada.

Rewarding Bright Ideas that Work

September 23, 2015

By Finn Poschmann
President and CEO
APEC | Atlantic Provinces Economic Council

Many of us talk a good game about innovation, entrepreneurship and “value-add” jobs in a “knowledge-based economy.” And when it comes to what, actually, to do about it, policymakers sometimes mumble and shuffle their feet. Or just keep talking.

It doesn’t have to be this way, and we certainly don’t have to keep wringing our hands over the shrinking Nova Scotia film tax credit.

What about a tax policy innovation that is instead fair to all sectors and across all regions? There is one, and I am thinking of what is known as an “innovation box.”

An innovation box separates business income that is earned from developing and applying research and other intellectual property (IP), and taxes it less than general business income. That rewards firms for developing, owning and exploiting IP where we live. It rewards people who put their bright ideas to work.

Those who worry about the state of public finances might wonder about the wisdom of a potential hole in tax revenue that the innovation box might create. Besides, a finance minister might argue, our R&D tax treatment is already generous. Legitimate points, but there are big upsides to the innovation box story.

First, better tax treatment in Canada will attract or retain investment and activity that otherwise might float offshore, through the Caribbean and on to Germany or China. There isn’t much tax revenue from what’s not here. And if businesses see an attractive tax proposition here, they can spend less time organizing their financing to limit domestic tax liabilities.

Another thing is location. Location matters. When research and manufacturing facilities are located near each other, both benefit. Researchers develop more patents and manufacturers get a productivity boost, which means better competitiveness and higher income.

Location is a people story: distance matters. When we bump into friends, neighbours, suppliers and competitors in the streets, we learn how to do things smarter. As we get smarter, we can do more and earn more.

Suppliers who compete up their game, making their customers better off. That is what productivity means.

And the innovation box might just help Atlantic Canada catch up with the rest of Canada. On a patents-per-capita basis, Atlantic Canada is running way, way behind central Canada and the West. Regionally, the Atlantic region generates at about a third of the annual rate in Alberta, and less than half the national average rate.

An innovation box is not really a tax policy idea that any one province should implement. We wouldn’t want Nova Scotia to carve out a tax path that only pulled in jobs from New Brunswick — that would be a zero sum or lose-lose game, from a regional and national perspective. The federal jurisdiction is the natural one.

And it is a national issue. Compared to other members of the Organization for Economic Co-operation and Development (OECD), and to developing nations like India, China and Brazil, Canada has a low growth rate in patent registrations, and our commercialization activity is none too high, either.

Yes, the innovation box would spread benefits across the country; what makes it especially interesting in the Atlantic region is that we have such a long way to go.

The innovation box is regionally and sectorally fair, which means government doesn’t have to pick winners or tell people what businesses they should be investing in. The market will sort that out.

Now, can it be done? The answer is that the Netherlands, Ireland, Spain and the United Kingdom, just for instance, have already done it, and the idea is in the mix in the United States. These countries do not see a race to the bottom — they see the benefits of synergies in co-locating research and manufacturing, and taking good advantage of smart people.

The idea deserves to be in the mix in Canada, too, and it will take just a little push to get it there.

This commentary first appeared in the Halifax Chronicle Herald, September 23, 2015

 

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September 23, 2015

Rewarding Bright Ideas that Work

 

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