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The R&D tax credit was introduced on 1 April this year. It is simple. It means that if a company spends $100 on R&D, their tax bill reduces by $15 If the company is a fledgling, and not yet making a profit and paying tax, then Inland Revenue sends them a cheque for $15.

Almost every western nation has some incentive for R&D and there are two basic reasons for doing so.

1. The first is that R&D is risky. It doesn't always work. The investment can be wasted, so businesses logically tend to under-invest unless incentivised otherwise.
2. The second is that companies that invest in R&D tend to be amongst the best companies in the economy. They are innovative. They are focused. They tend to grow faster, take on more skilled employees, and they tend to export. In other words they make a disproportionately high contribution to economic development. If their taxes are lowered, reinvestment in the company goes up. These are companies that are least likely to take profits out of the business and most likely to plough profits back into the business. They are, on average, more likely to be smart, restless and internationally focused.

They are the very companies every economy needs more of.  That's why almost every western government offers incentives of some form or another.

We have about 3000 such companies in New Zealand, and we need more. But under National's plan, the tax credit will be scrapped and those 3000 companies will face a tax increase. Their growth rate will drop, their ability to export will drop and their ability to innovate will drop. Those smart companies will become less smart.

For what? So that the extra money the government would receive can go into a modest personal tax cut. It's modest because the tax gathered from 3000 companies is then spread very thinly across everyone.

One of New Zealand's inconvenient truths is that private sector expenditure on R&D is almost exactly one-third of the western world average. Yes, New Zealanders are an innovative lot, but our companies are painfully bad at investing in R&D and commercialising R&D successes. The lack of a tax incentive until 1 April this year is one reason why.

When the tax credit was introduced, officials at Inland Revenue had to work out how much tax would be foregone. Their modelling calculated that the full effect would be $332 million a year, enough to drive reported private sector R&D expenditure from one-third of the western world average to almost exactly two-thirds.

Not bad. Imagine the value of that increase on the growth of smart businesses, the growth of high-skilled employment and the growth of non-commodity exports. Then imagine the value to our institutions - universities, crown research institutes - who would capture part of that increase by winning research contracts.

Finally, ask how much extra money would go to individuals if National were to cancel the tax credit and give all of us the proceeds. My calculations are that each person would be better off by $1.60 per week.

A smart future, or a dumb future plus $1.60 per week? I say that cancelling the tax credit would be a very stupid thing to do.

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