The OTA published a 1995 study specifically about the credit that summarized its interview evidence. It concluded that “Interview evidence along these lines lends credence to the hypothesis that corporate R&D strategies in the aggregate would not change substantially if the tax credit disappeared altogether. This hypothesis does not maintain that the tax credit is irrelevant -- rather, it suggests that the credit is only a weak signal amid a powerful array of forces that shape individual and especially aggregate corporate R&D trajectories.”
This careful language leaves the door open to precisely what the statistical studies have found -- a modest increase of R&D in response to the modest credit (about 3% of business R&D spending over the past decade).
It’s interesting that the interviews to which you refer were conducted during the only fiscal year during which the credit had lapsed and was not renewed retroactively. That might account for the high negative response rate. I don’t know of any interview evidence published since then.
Here's an academic view: Even garden variety product improvements and cost reductions bring economic benefits. Ten small improvement projects worth $20,000 with a high chance of success may generate more economic benefit than a single $200,000 visionary project with a moderate chance of success. To an economist, they are equally deserving of public support. Attempting to pick and choose among projects imposes large administrative burdens on firms and the IRS.
See Dr. Tassey's comments above.
Dr. Tassey believes decisions regarding R&D are made for strategic reasons thus the elasticity assumptions in economists studies are overstated.
I disagree that the GAO quote is out of context. The GAO was trying to assess the impact of the incremental nature credit, but was making the point that that was hard to determine because it was not possible to know how much R&D would have been done without the credit. That is exactly the calculation that economists attempt to make in their contrafactual studies.
Instead of relying on abstract mathematical formulae, I would suggest economists undertake a study of the decision-making process with regard to R&D budgeting. I am quite sure that there are very few large companies that include the research credit as an input into the process.
Please see Dr. Tassey's comments:
"However, interviews of industry R&D managers for an OTA study indicated little impact of any type on decision making from the U.S. credit. Therefore, this policy mechanism ‘‘represents more of a financial tool than a technology tool’’ (Office of Technology Assessment 1995). As a result, the credit is of primary interest to corporations’ tax accountants. In fact, in a 1996 Industrial Research Institute R&D spending survey, 55% of responding companies indicated that the credit was ‘‘not at all’’ influential even in establishing the level of their companies’ R&D investment."
Many of the big companies don"t even do real "R&D", they do "TD", which mean "Technology Development", which is really just product development, which they would do anyway. We DO need this credit to stimulate R&D, but it needs better scrutiny so that the companies that claim it actually DO R&D, not just add some gravy onto the product development that they would do anyway.
How about a simpler approach? Allowing companies to use the cost of the development R&D on a product (or family of products) to offset the profits that would be taxed on that profit. It provides incentive for companies to spend money on R&D efforts that can be profitable and then realize the savings in taxes when they are. Thoughts???
Not ineffectual, just not as effectual as it could be.
Companies should not be too complacent about a credit that was reduced three times during the 80s, allowed to lapse for an entire year in 95/96, and renewed the last 8 times as much as a year after it expired.
The modification you propose would gut the credit for many industries and harm economic growth. Let’s keep the R&D credit and add a double credit for R&D tied to US manufacturing. It took the electronics industry years to move to Asia, and it would take years to move back.
(1) The argument that the marginal project is worthless comes from economic theory, not from reality. Big companies cancel excellent projects all the time for strategic reasons that have nothing to do with the economy as a whole. That’s often why engineers leave companies and form start-ups: to pursue the ideas their former boss would not.
By the way, your argument here requires one to accept that companies think of the credit as a lump sum (with all projects ordered by net expected value), not project-by-project!
(2) The number of researchers in the US isn’t fixed over the course of a year; they cross borders, they enter from other fields. The personnel constraint is only an issue in the case of a huge increase in funding like a defense build-up, not for a credit that is available year after year.
(3) Multiplier effects are good. The credit can be improved, but even a “not very strong” multiplier is a good start. It is widely accepted that R&D spurs growth well beyond the cost of the R&D.
As you know, Tassey’s next sentence is “Given the limitations of incremental tax credits, consideration should be given to a substantial flat tax credit that would significantly lower the cost of R&D year over year.” He is as much for “amend it, don’t end it” as I am. We agree a flat credit would be a better system and, as Tassey says on the same page: “tax policy ... has a role in increasing the amount of such investment.”
The GAO quote you take out of context is about the credit’s incremental design, not about the credit as a whole. The bottom line in the report you’re citing is to make the Alternative Simplified Credit option the only one available, not to eliminate the credit.