Rashkin goes on to argue that the credit is ineffective because it is
small, stating, “Congress imposed restrictions to reduce the cost of the
credit, but at the same time these limitations diminish its
effectiveness. They also reduce its cost.” This is illogical. If the
credit were more generous it would have a larger incentive effect. Don’t
blame the very nature of the credit for the fact that because it is so
weak that it doesn’t spur as much R&D as it should.
In fact, as ITIF has found
the U.S. ranks 27th in R&D tax incentive generosity, down from
first in the early 1990s. French and Indian companies, for example,
receive an R&D tax incentive five times more generous than in the
U.S. Yes, the R&D credit is not as effective as it could be, but
only because it’s rate is so low.
Rashkin also argues that the
U.S. government supports basic research, hence the R&D credit is
just a subsidy. Government support for basic research helps not just
U.S. companies but also global companies since knowledge easily crosses
borders. He also claims that companies can not only take the credit but
also write off R&D expenditures. In fact, the expensing of research costs
is reduced by the amount of the credit taken.
R&D credit would raise taxes on technology-based firms in the United
States, making them even less competitive in global markets. But this
is of no consequence to Rashkin, who seems to believe that the U.S. is
immune to foreign competition.
But as we argue in Innovation Economics: The Race for Global Advantage,
“since the late 1990s the United States has been losing out to other
nations with respect to competitiveness and innovation, the result of
too few resources going to wealth-creating investments like research and
In today’s intensively competitive world where the
U.S. has the highest statutory corporate tax rate and an extremely high
effective tax rate, raising taxes on companies competing in global
markets would make the U.S. even less competitive.
Rashkin doesn’t say what Congress should do with the savings from
R&D credit repeal. If he agreed that we should not raise taxes on
corporations in the U.S. he might propose using the savings to pay for
corporate tax rate reduction. In fact, this would enable the rate to be
reduced just one point to 34 percent. But it would also result in higher
effective taxes for companies that do R&D.
credit corrects a serious market failure and spurs U.S. companies to
invest in more R&D, creating more jobs, more competitive firms and a
stronger U.S. economy.
--Robert Atkinson is president of the Information Technology and Innovation Foundation
The lame duck session of Congress appears to be consumed with negotiating and the usual posturing over budget "sequestration," aka, "The Fiscal Cliff". The guess here is that perhaps in the course of tinkering with the tax code, lawmakers decide to extend the R&D tax credit for a couple of years to address market "uncertainty" issues.
A great argument, Robert, but I fear one that faces an uphill battle. In other words I'm less optimistic than George that it will be extended. The tech industry just doesn't seem to have the same lobbying clout as an Idaho potato farmer.
Yes, I too thought that the original Rashkin article was strinkingly short-sighted and shallow. Even the point about "for each tax dollar saved, only 1 dollar is spent in R&D" doesn't make a lot of sense.
Even if only one dollar extra is spent in R&D, the multiplier is expected DOWNSTREAM, from the products, jobs, etc., that the R&D investment creates. Success of the tax break should not be measured by how much more R&D spending the company does, over and above the tax break. The question is simply, does the tax break create more R&D programs? If the answer is yes, and even Rashkin says the answer is yes, then that's enough.
We are facing crippling national debt because of reckless new spending that both the previous administration and this one have created. I know there are those who keep harping on "unpaid wars." That's part of it, but a much greater spike in public spending was caused by the failed government-backed subprime mortgages. Which burst the housing bubble. A housing bubble created by foolish government programs.
That's what the original TARP program addressed, and that over-trillion-dollar deficit spending became the "new normal" since 2009.
Now the fashion has been to look at taxing more and more, and becoming as creative as possible to "explain" why any previous tax break should be on the chopping block.
Well-written article. Yes, the "free market" will under-supply R&D due to positive spill-over externalities. The R&D credit is likely one of the best ways of correcting this very clear and simple market failures. It really is sad how many libertopian-types refuse to admit that "free market" theory is based on a bunch of ridiculous assumptions that are not even remotely valid in the real world, and that the government can and should correct these deviations when practical.
The free market is like gambling in that the combination of skill and luck is frequently rewarded.
But like in gambling, the free market can be and is victimized by people, companies and indeed nations that cheat by introducing market distortions that their fellow honest players can only counter by either electing not to play or by cheating themselves.
R&D tax credit is indeed a very useful way to incentivize the right kind of activity, but it is much abused by many practitioners. Companies often claim the R&D credit for activities which are not R&D related. In fact, some of these are so ridiculous that it is difficult to classify them as science or enginering of any kind. This is most frequenly done by shifting some SG&A expenses into R&D. It is called creative accounting.
Yes the R&D credit should continue, but its common abuse should be stoppped somehow.
I had to read this twice, to see the logic involved.
So, if the government taxes the US operations of corporations to the tune of just about 40 percent, and then it allows the company to retain some more of its profit if it would just spend it on R&D, we need to thank the government for having the foresight to funnel more money into R&D? Because otherwise, the company would never do it on its own?
That seems a bit of a stretch. My way of presenting this would instead be, US corporations, for US operations, are taxed at stratospheric levels. However, AT LEAST the government is smart enough to know to give them a break to incentivize R&D.
And even so, there are some out there who want to take even that break away, with the idea that really and truly, the government knows best how to spend everyone's money, and the profits of their businesses too.
You are confusing nominal statuatory rates with actual ones. Our net corporate tax rates are in the low twenties, which puts us right in the middle of the international pack. This, of course, is not a great way to go about things and could use some reform, but it is simply not the case that a typical corporation pays anywhere near 40% in taxes.
And yes, targeted tax breaks are subsidies - sometimes justified and sometimes not. Are we better off with simply lower rates, or slighly higher rates plus the R&D credit? The answer is not obvious as there are merits and de-merits to both sides. But it is hard to work through this when one political party just screams "gub'mint bad cut taxes!!!" and refuses to engage in serious discussion.
In response to Brian and George, one can only keep up the good fight and present policy makers with the superior argument. For Bert just because there is an argument to keep a tax incentive does not mean its incorrect or special pleading, just as it would be wrong to say that about spending programs. some are worth continuing and some are not. Its up the policy process to try to figure out which ones are worth it, as is the case with R&D credit. and re BErt's other comment, you are confusing taxes with policies. I think we should cut corp tax rate, but that is not central to the argument for R&D credit, which is that it is a policy that maximizes economic growth more than would be the case if companies just invested on their own accord. Yes, markets do get it wrong. As do companies who are trying to maximize short term equity rather than maximize net present value shareholder value.
Join our online Radio Show on Friday 11th July starting at 2:00pm Eastern, when EETimes editor of all things fun and interesting, Max Maxfield, and embedded systems expert, Jack Ganssle, will debate as to just what is, and is not, and embedded system.