Rui Costa, Nikhil Datta, Stephen Machin, Sandra McNally

Estimates from the US suggest that increasing levels of human capital over the second half of the last century accounted for approximately one third of productivity growth, while some estimates of the social rate of return to R&D in the manufacturing sector have exceeded one hundred percent. Despite the contribution of both human capital and R&D to economic growth, the UK fiscal system does not treat the two equally when it comes to employer incentives to invest. Firms that invest in R&D are able to claim generous tax relief on their investments whereas there is no such across-the-board incentive to invest in the training of their workers. This is despite the fact that the rationale for government support to firm investment in human capital is similar to that for R&D and both are important for economic growth. We explain the economic rationale for government support in the form of tax credits, discuss current practice in the UK in relation to R&D, and address the evidence on effectiveness. We then discuss how the policy might be adapted to provide similar incentives for investing in human capital.

JEL Codes  
H23: Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
O30: Technological Change; Research and Development; Intellectual Property Rights: General
human capital
research and development
tax relief
United Kingdom