Abstract
Research and development (R&D) activity has long held a privileged place in the U.S. income tax system and in policy debates. The premises for R&D tax incentives, however, are grounded in theory regarding a market failure for investment in R&D that does not align well with the target of U.S. R&D tax incentives. Moreover, factors contributing to innovation are now understood to include, in addition to R&D, other “knowledge-based capital” (KBC), investment in training and other human capital development, organizational processes, computer software, and architectural and engineering designs. The combination of existing R&D tax incentives, income shifting, and deferral of foreign income from U.S. tax, with intellectual property protection for successful R&D, result a poorly designed mix of overlapping benefits only loosely related to fostering innovation. Proposed “innovation box” tax incentives would add to the incoherence of the existing incentives. This article calls for a re-examination of U.S. R&D tax incentives under a framework that critically examines the scope of tax incentives and how they fit into an overall U.S. R&D and innovation incentive regime. The framework requires an evaluation whether R&D tax incentives address market failure or other nontax objectives, whether tax incentives are designed to efficiently achieve those objectives, and whether regulatory or direct expenditure alternatives would be more effective in achieving those objectives.
Highlights
Research and development (R&D) activity has long held a privileged place in the U.S income tax system and in economic and tax policy debates
This Article does not examine a range of other tax provisions that directly or indirectly relate to R&D or intellectual property (IP), including § 167(f)(1), § 167(g)(8), § 1221(a)(3), § 1221(b)(3), step one of the framework we conclude that under traditional tax policy metrics, these provisions are more favorable to taxpayers than is consistent with an objective of accurately measuring income. They properly are considered tax expenditures. We demonstrate how these R&D-specific tax expenditures may be magnified through interaction with another tax expenditure, the deferral of U.S tax on most active foreign income of controlled foreign corporations.[16]
In evaluating the use of R&D tax incentives to respond to an uncertain amount of private R&D under-investment and uncertain prospects for stimulating economic growth, it is important to take account of nontax regulatory responses, such as patent and other intellectual property (IP) protections for R&D, and direct expenditure responses, such as public funding by the military, the National Science Foundation (NSF), and the National Institutes of Health (NIH) of R&D activity
Summary
Research and development (R&D) activity has long held a privileged place in the U.S income tax system and in economic and tax policy debates. In evaluating the use of R&D tax incentives to respond to an uncertain amount of private R&D under-investment and uncertain prospects for stimulating economic growth, it is important to take account of nontax regulatory responses, such as patent and other intellectual property (IP) protections for R&D, and direct expenditure responses, such as public funding by the military, the National Science Foundation (NSF), and the National Institutes of Health (NIH) of R&D activity All of these approaches are used in the United States, but with insufficient policy coordination and prioritization for the use of resources.[23]. More important for our discussion, this approach takes the concept of R&D far away from the reach of any likely market failure of under-investment in R&D, undercutting that economic rationale for the § 174 deduction
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