Tax Policy and Pharmaceutical Innovation

Abstract

The COVID-19 pandemic has exposed severe underinvestment in sustained research and development (R&D) of vaccines to prevent public health crises. Evidently, policy and lawmakers have attempted to establish incentives for pharmaceutical R&D, spending billions upon billions of dollars in the process. However, they so far utilized a limited set of tools such as patents, grants, and to a lesser extent prizes to encourage discoveries in vaccine technology. In particular, commentators have paid relatively little attention to the role of taxation in delivering efficient vaccine research incentives.This Article fills this gap in the literature and in policy by examining ways to better employ the tax system to spur investments in vaccine discoveries. We demonstrate that, when designed properly, tax apparatuses can offer an incomparable advantage—its ability to harness market-based mechanisms ex ante thus economize on resources, administrative costs, regulatory capture, and information problems. By contrast, other regulatory interventions currently used to stimulate investment in R&D, require resource-intensive interventions, either through the provision of advanced funding or other types of administrative resources, or both.Building on this analytical framework, the Article offers a novel insight: the market-based characteristics of tax incentives make the tax system especially well-suited to address underinvestment in pharmaceutical innovation, particularly in the field of vaccine research. Based on this insight, we develop here a proposal for tax policy that spurs research in vaccines for emerging infectious diseases before outbreaks occur in a more simplified, administrative, and efficient manner than current policy tools. Our proposal provides R&D support in a predictable, streamlined fashion thus minimizing investment risk in uncertain vaccine development processes. It further illustrates how the tax system can be used as an effective tool for equitable distribution of the cost of developing vaccines for emerging diseases, which to date has never been fully explored. Our proposal starts that conversation by offering a blueprint for possible interventions in other traditionally underfunded areas.