The author, a tech industry veteran, makes a compelling case that the U.S. R&D tax credit is a bust, resulting in virtually no new investment in U.S. innovation. We have argued that any renewal of the tax credit should be tied to strict requirements for investing in U.S. design and manufacturing. Michael Rashkin thinks we should just let the R&D credit die.
"...the $10 billion we spend each year on the credit is mostly a financial transfer from the government to large multinational corporations with no benefit to U.S. taxpayers."
In reality, this is a financial transfer from U.S. taxpayers to large multinational corporations. Theft will never lead to sustainable prosperity.
The author makes an excellent point here:
"...Part of the problem with the research credit is that it goes to companies that do not need it. Over 80 percent of the credits earned go to very large companies. Apple, Google, Microsoft and Intel already have billions of dollars in the bank, and are therefore unlikely to increase their R&D expenditures as a result of a small tax incentive. On the other hand, start-ups that can use additional financing do not benefit from the credit since they are not profitable and have no tax liability against which they can apply the credit."
So...obviously, the usual lip-service to "the increase in R&D credit" ain't working!
It's easy to claim, as Michael Rashkin does, that the R&D tax credit falls short of some mythical ideal. But the facts show that the credit does what it was designed to do: measurably increase the level of US R&D spending. No one is claiming that the tech industry will be lost without it. The claim from those, like myself, who study the credit from the academic side is that the US will be poorer in the long run without it.
The fact that no company "has announced an invention or product that was produced as a result of the R&D tax credit" is meaningless. The credit is not targeted on a project-by-project basis. In practice, most large companies (the ones that perform the most R&D) choose a level of spending with the credit in mind, then allocate to separate projects later. So there will never be a project that is directly linked to the credit.
The R&D credit is project based. By statute, each project must separately qualify and the IRS requires documentation showing that each project satisfies the requirements of the credit.
The fact that industry has not announced even one project that it has done because of the credit is pretty telling,
The large companies do not choose a level of spending with the credit in mind. This an academic theory and academia has been misled here. In reality the R&D credit is not involved in the decision making over the level of R&D spending. Academia cannot refute this because except in one case 25 years ago they have not actually surveyed the decision-makers but have relied on mathematical formulas in determining the effect of the credit.
Economists talk with industry people all the time. We’re obviously talking with different people than you so that particular point won’t get resolved here.
The limitations of the tests that have been done involve the poor quality of the available data, not the use of math. Statistics tests are a useful way of finding out if people do what they say, like spend more on R&D. Qualitative research with retrospective interviews aren’t worth much because it’s too easy for industry to say that this or that project had gone forward because of the credit after the fact.
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."
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.
Dear Mr. Rashkin,
Your book 'Practical Guide to R&D tax incentives' is like my Bible and I can assure you that my company owes a lot to the R&D tax credit, even though our new processes or products are not widely publicized
G-Linden makes an excellent point that the failure of companies to link an invention to the tax credit is not significant. R&D is a long time process that doesn't tie results to a particular dollar of income or credit. That said, I've certainly seen companies on tight research budgets expend considerable effort in documenting and claiming the credit. Apparently they do think it matters.
Rashkin implies that credit should cause companies to increase research spending by multiple times the amount of the credit. But the dollar-for-dollar increase in R&D spending (compared to the tax cost of the credit) is no sign of failure. Many other subsidies only cause companies to move money from one account to another, without increasing spending. Here we have one that has been documented by multiple studies to actually increase R&D spending, and in a way that allows firms, not government bureaucrats, to choose the projects where that money is spent.
The claim that the credit is "hardly enough to make a company engage in research it otherwise wouldn’t undertake" flies in the face of the careful studies that show the contrary. Particularly at a time when a slow economy is causing many companies to trim their R&D budgets to the bare minimum, it seems like a stretch to claim that an effective 5 percent rebate (Rashkin’s number) could fail to have an influence.
Yes, there are studies. Based on my own interaction with those in the industry I know those studies are completely incorrect, but I am not the only one.
"As currently structured, the U.S. R&E credit probably has had at most a minor and transitory effect on industry R&D spending.’’ Dr. Gregory Tassey, National Institute of Standards and Technology
‘‘In reality, it is impossible for policymakers to know how much research spending taxpayers would have done without the credit.’’ Government Accountability Office,
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.
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.
It is out of context because the GAO is referring to the screwy base estimate required to calculate the credit. The econometric studies use very different approaches to generate their counterfactual spending estimates, so the GAO quote does not apply to them at all. Otherwise, the GAO would have referred to academics, not to policymakers.
As for the corporate decision making process, I thought we beat that to death about two comments ago.
The fact that the credit goes mostly to large companies with good cash flow simply reflects that large companies do most of the R&D. The tax credit in its current form is designed to reward a targeted activity, R&D, at profitable, tax-paying companies, not to help out cash-constrained companies. So again, this criticism accuses the credit of falling short of a target it was never designed to reach.
One point where we agree is that the credit should be made more attractive to small companies and start-ups. That was part of the proposals in a report I co-authored with Laura Tyson for the Center for American Progress. The full report can be downloaded at http://www.americanprogress.org/issues/2012/01/corporate_r_and_d.html
Rashkin complains that the credit does not have a "multiplier effect". But the multiplier effect here does not operate at the company level; it operates at the level of the economy. It has been shown that every dollar of business R&D spending has about twice as big a benefit for other parts of the economy as it does for each firm that spends it. This economy-wide impact is above and beyond the dollar-for-dollar impact that, by itself, justifies the credit’s continued existence.
In other words, left to itself, industry will, from society’s perspective, invest too little in research. Rashkin dismisses this because it “does not square with free market economics”. This is a nonsensical statement because the whole point about recognizing that firms underinvest in R&D from the standpoint of the economy as a whole is that it is a failure of the “free market” ideal to which Rashkin refers.
In its testimony before the Senate Finance Committee on September 20, 2011, the representative of the OECD stated that any additional research that is done by a company because of a research incentive tends to the kind that produces the lowest returns to the company.
The reason for this is that companies are going to do a certain amount of research in any event and the R&D that they do because of a tax credit is from the bottom of their barrel of research projects.
Another witness said that since we have a limit on the number of researchers in this country, the R&D credit does not increase R&D but increases R&D costs.
If there were a multiplier effect for the economy it wouldn't be a very strong one.
(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.
Rashkin turns reality on its head by claiming that the credit rewards “behavior that is detrimental to the U.S. economy”. That’s just silly. The credit rewards the performance of R&D in US-based labs by any company, including foreign multinationals. The presence of that R&D in the US has value in itself (e.g., providing incentives for students to choose majors in science and technology because they can see a future in it) that is totally separate from the very important issues surrounding the long-term decline in US manufacturing. The R&D tax credit cannot be blamed for the steady shift to offshore manufacturing, and the credit’s loss, which can only speed the parallel movement offshore of R&D, will do nothing to bring manufacturing back.
I agree that the credit does not encourage companies to manufacture overseas, but our system does. And if our system also rewards those that do so with a research credit then this is just icing on the top of the cake we have baked for these multinationals.
We can help bring US manufacturing back by tying the credit to US manufacturing. If a company does not manufacture its product here, it should not get a credit.
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.
In reality, the R&D tax credit has barely been given a chance to work. With an average extension duration of less than 2 years since its creation, the credit has been so unreliable that companies would be crazy to develop long-term spending plans around it. Once the credit is renewed for five years or more, or even permanently, companies will have a better how to incorporate it into their plans -- especially if it is simplified along the lines that Laura Tyson, Rob Atkinson, myself, and others have been advocating.
In short, Rashkin’s complaints about the credit don’t stand up to the evidence. US innovation is vital for US economic growth and is too important to play games with. The R&D tax credit needs to be renewed, improved, and extended.
So G-Linden agree the credit has been ineffectual?
The credit has been in existence for 31 years. At its enactment in 1981, it was in place for 5 years before expiring. It has been renewed ever since. Companies are fairly confident that it would be renewed because everyone is in favor of it.
So there has been plenty of time for this credit to do its job, but it just hasn't
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 R&D tax credit IS valuable. Don't throw the baby out with the bath water. The firm I founded and own, Tax Point Advisors, Inc., works with CPAs & their clients across the U.S. by helping companies claim this credit. Except for a handful of large companies, the rest - nearly all - are under $100m in sales. And the great majority are $5m - $50m in sales. The credits - often cash refunds - they receive from the R&D tax credit program are an enormous benefit to such small companies. I have seen time and again clients use cash from the credits to hire new technical staff, to buy new equipment, etc. That is not to negate Mr. Rashkin's point that a majority for the $8b - $10b claimed each year in Federal R&D credits goes to major corporations, which, generally, do not need tax "breaks." So, limit the credit for the small to mid-size companies which DO need the help and financial incentives, and which - studies have shown - use this benefit to create new jobs? About 70-75% of the U.S. workers for companies of 100 or fewer employees, and such small business have always been the engine of economic recovery after recessions. So, why not help them, while taking away subsidies for Apple and the like? Simply 1) make the R&D tax credit a permanent part of the U.S. Tax Code, and 2) make it limited to small to mid-size companies (I would suggest up to $100m in annual sales).
Jeffrey Feingold,Founder and Managing Partner
Tax Point Advisors, Inc.
Offices across the U.S., including CA, MA, NY, OH, and TX
www.taxpointadvisors.com; (800) 260-4138
In several branches of the industry, the real innovation happens in start-ups, who will have very little turnover and thus benefit very marginally from any tax credit. Generally the innovations of start-ups then become the products of the bigger firms. By focussing the use of the $10bn to aid start-ups by some means, whether it be through grants or by a government backed VC/angel funding program, there would be a lot more effective multiplication of the value of the tax revenue used.
Giving tax breaks to large profitable corporations is a very inefficient way to get any new innovation.
This is a fascinating discussion. I must admit, this is the first time I have ever read/heard any credible analysis arguing against the R&D tax credit. It's practically gospel in tech that the R&D tax credit is vital. Perhaps we should re-evaluate. But at the same time, I don't discount the fine points made by those on this forum arguing in its favor. If there is one thing we cannot afford in the U.S., it is to fall behind in R&D. We are already, in my opinion, feeling the effects of reduced spending on basic sciences and physics research (Bell Labs, etc.).
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???
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.
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.
G-Liden, the title of your report is ,"The Corporate R&D Tax Credit
and U.S. Innovation
and Competitiveness". As you've stated, the goal of the tax credit is to spur innovation and not to simply subsidize jobs. The official name of the credit per your report is the "Credit for Increasing Research
Activities". Please note that there is a significant difference in activities associated with Research than those associated with Development. To lump these activities together categorically removes the entire purpose of the credit all together, which is to spur innovation. It seems that you wish for the credit to continue as a product development subsidy rather than an innovation incentive.
To me, your comment implies that innovation is a narrow activity limited to pursuing new ideas that aren't ready for the market. Most academics use a much broader definition of innovation that encompasses improvements to existing products and processes.
The position we took in the report is that the definition of activities qualifying for the credit should be made the same as those already qualifying for the deduction of research expenses. Those would include "All costs required for the development or improvement of a product".
As I’ve explained in other comments here, the category of “improvements” still fits the economic definition of a market failure that justifies the credit.
Then it would seem that your analysis has a fundamental flaw since, "The goal of this corporate R&D tax credit is to encourage R&D investment by domestic and foreign firms alike by rewarding incremental, qualified research in the United States." How can you claim effectiveness of the credit if you don't differentiate research activities from development? This distinction seems fundamentally important as research activities are the ones that need government stimulation while development activities are generally stimulated by market forces.
My knowledge of the credit is limited, but I have a hard time understanding the argument for an additional subsidy for development activities without return compensation.
Then let me be the first company to officially announce a product that was produced as a result of the R&D tax credit. This credit allowed my small company to hire one more person to create our Online IP Screening Service and to make improvements to our core CodeSuite product. Why does everyone forget about the small businesses when discussing tax credits?
President, SAFE Corporation
Congratulations on your product development, but lets go over this one more time: Product development is not R&D. Got it? Product Development is not R&D! Product development cost is subtracted from your revenues for tax purposes already. Just like the child care tax deduction cannot be applied to the family dog, the R&D tax credit should not be applied to activities that are not R&D, and Product Development is not R&D!
Product development is not R&D? Isn't that preposterous?
In industry, the "research" half of R&D is virtually ALWAYS aimed at ultimate product development. I say "virtually" only because some major corporations do have blue sky research facilities, with theoretically no end product mandate, but it's pretty obvious why corporate funds these facilities.
Basic research traditionally done in universities is great stuff, but it's hardly the end-all of R&D. Growing an economy can only come from product development.
Product development is not research. New technologies, such as the creation of Gorilla Glass and Li-ion batteries, are examples of research activities. Sure, these are products to the companies that produce them because one company's output is another input, but neither of these 'products' are destined for end-users. Incorporating Gorilla Glass and advanced batteries into a smartphone and tablets is solely product development and driven by the market forces. Investment in research activities spurs product development and grows the economy. This is an example of the multiplier effect. A multiplier of 1 is simply a jobs subsidy. Without the basic technology resulting from research the applied products for end-users can't be developed.
You missed the point. The tax credits are not just for pure research. They are for R&D. Which includes, for example, research into how best to incorporate emerging technologies into new products.
For example, when a company develops a new codec, to be used in a new software product, that qualifies as R&D. The new codec doesn't have to be something totally unrelated to previous codecs. In fact, if you look at the way codecs work, you'll see that almost always they are further developments of what came before. But that qualifies, along with actually incorporating the codec into the new software. Product development. It's all part of R&D.
I understand perfectly well what the multiplier effect is. What I am saying is that a tax break of $1 for investing in R&D does NOT have to cause the company to invest $10 in R&D, for that tax break to be effective. What must happen is that the $1 investment in R&D should create, say, $10 in increased revenue, for the R&D to have been fruitful. Even if a company's R&D amounts only to what the tax break was, and that R&D creates a good return on investment down the road, the tax credit would have been a success.
For some reason the "Reply" function is not appearing on your last reply.
The quote you cited is a description of the credit as currently designed. It is not what we think the credit actually does, or should do.
If you give me a concrete example of a development project, I'll try and explain why I think it merits (partial) public support.
The problem is interpretation. Take a look at this:
and specifically, this:
How does a company go about properly documenting its research and development expenses?
"[Documentation] should be gathered while you’re actually doing [the research], even if you’re building something in a garage without a formal R&D plan. You want to keep all the diagrams you make and all the schematics, whether they are on paper or written on a napkin. Keep time sheets for anyone doing research, even if they are salaried, and note what they are working on and when. If you can document that 80 percent of a person’s activity is qualified research and development, you can utilize 100 percent of their wages for the credit."
In other words, product development is part of the equation.
Yes, today R&D is lumped together. It shouldn't and that seems to be the argument many are making, should product development qualify for the credit in the future? Is product development, in general, innovation? I'd argue that product development shouldn't. The credit's intent is to spur innovation. Companies don't need government incentive to create new products as that is the role of the market. Risk is found in research of new technologies where markets may not yet exist. Apple, for example, doesn't need incentive to create the iPad3 or iPhone5 as the marketplace drives this development. New components that are found in these devices may be a separate concern.
I'm not arguing so much about whether product development SHOULD or SHOULD NOT be included. What I'm arguing is only what the tax credit is intended for.
Let me give you a simple example. When I work on a new product, my time is often spent on tasks that a customer is not yet supporting. The company pays me from an account that does not get funded by the customer. That work might involve, for example, researching the literature, writing up the way the new gizmo will work, spending time in meetings or telecons to get agreement from my peers.
This qualifies. Even if I'm not working in a lab, splitting neutrinos. A lot of corporate R&D is just this sort of activity.
How do you define innovation? To me, a new product that performs functions not possible with previously available products, is innovation.
As to whether Apple "deserves" this tax credit, that's a different discussion. It does bug me if they take my tax dollars and send them overseas to do the work, definitely.
Risk is not the only source of market failure that the credit is designed to offset. A more important problem is technological spillover. Every innovation incorporated in the iPad3 or iPhone5 will be copied, invented around, or surpassed by Apple’s rivals as soon as they can manage, depriving Apple – and its suppliers -- of some of the potential returns to their innovations. Apple’s continued influence of the handset and computer industry has forced two whole industries to raise their game, something it’s hard to put a price on.
Obviously Apple doesn’t “need” credits. But how many products dominate their categories in this way? The tax code cannot easily distinguish among them.
Private R&D has measurable positive impacts within and across industries that bring no benefit to the firm that did the research. Business history is littered with products that were influential yet not highly profitable for the innovators. The economy-wide spillover benefits of R&D provide a much stronger reason for the credit than does the presence of market risk.
This is primarily directed at Harold Miner. Here's another explanation of what constitutes qualified R&D:
The 1986 Tax Reform Act targeted the definition of qualified research with respect to which the credit is allowed. Initially, the term “qualified research” is defined as research with respect to which expenditures may be treated as expenses under section 174. In addition, section 41(d) sets forth three other requirements, some of which have been subject to extensive controversies between the IRS and taxpayers. Specifically, to constitute qualified research:
The research must be undertaken for the purpose of discovering information that is technological in nature;
Substantially all of the research activities must constitute a process of experimentation; and
The experimentation must relate to a permitted purpose.
This definition is relatively broad and encompasses such activities as:
Developing new or improved products, processes or formulas;
Developing prototypes or models;
Developing or applying for patents;
Developing new technology;
Developing or improving software technologies;
Building or improving manufacturing facilities; and
Streamlining internal processes.
Thgis is not intended only for basic research.
Far be it from me to dispute the likelihood that taxation policies don't often do what they were intended to do. It's been my contention that the government is often incompetent at picking winners and losers, and this R&D tax credit may be tangentially related, maybe.
But I will dispute one point. If $1 of tax credit for R&D results in $1 of increased R&D expenditure, that's complete success. You don't expect a "multiplier effect" during this step. What you do expect is a multiplier effect from that company's investment in R&D. Meaning, every dollar invested in R&D had better result in many dollars of increased revenue downstream.
And I have no reason to believe that this isn't in fact happening.
The only question is, would the giants invest in R&D to the same degree, whether or not they got a tax credit? I dunno. The author claims they would. We all know that the government can throiw taxpayers' dollars down a huge assortment of "black holes," never to be seen again, so perhaps subsidizing R&D is not the worst example of waste?
We all tend to ignore evidence that interferes with our view of the world.
I have personally spoken to many corporate tax executives that have admitted that the R&D credit plays no role in their company's R&D spending. I have never found one that says the credit works. I am curious of what you think of this evidence.
Please see this quote from a Business Week writer:
"In the 20 years I’ve been at Business Week, we often have corporate executives who come through the office to talk about one thing or another. And they make their pitch for what- ever it is, and then I ask them, usually off the record, about provisions like the R&D credit. And I can tell you that in 20 years, I’ve never had a single corporate executive from the pharmaceutical industry or the high tech industry, or anyplace else tell me that they have done a dime’s worth of research that they otherwise wouldn’t have done as a result of the R&D credit."
So when you say that you have no reason to believe that the R&D credit is not working, it seems that you actually mean that you prefer to ignore or not to accept the evidence that doesn't support your pov.
I agree with Mr. Rashkin. In my world, companies perform R&D due to the competitive nature of the business and not because of an R&D tax credit. This is a fact that I have seen since the passage of the tax credit. An entire army of "experts" have benefited from this credit - accounting and law firms, lobbyists, in-house tax personnel, IRS, etc. all hired to develop, audit and/or defend a tax credit for R&D that companies do anyway to survive (innovate or die) and proudly announce to the world in there financial statements that they are innovators and are increasing R&D by X %.
If the R&D tax credit was not renewed, then there would not be a drop off in R&D funding because innovation is the engine that drives hi-tech companies to develop better smart phones, tablets, chips, manufacturing devices, etc.
(1) Just because companies would continue to do most of their R&D because of the credit, it does not follow that "If the R&D tax credit was not renewed, then there would not be a drop off in R&D funding". The data evidence, such as it is, suggests otherwise.
(2) Myself and others are advocating simplification and extension of the credit to take some of the "accounting and law firms, lobbyists, in-house tax personnel, IRS" out of it.
Hi G-Linder - Can you provide the evidence you mention? I am sure there is evidence that can support anyone's position. I can only tell you of my R&D tax credit experiences (some big and small) with many hi-tech entities over decades.
I have been working on the R&D tax credit since the beginning and as companies develop R&D funding for projects I have never seen them consider whether the tax credit is available or not. Their focus is on completing R&D project objects under a fixed budget that does not consider the tax credit. You will never get the IRS, lawyers, lobbyists, consultants and in-house personnel out of the R&D tax credit
as long as you have the credit. I believe it would be best to drop the tax credit in
favor of a lower tax rate for all companies.
Sorry, I did not see this comment earlier. I'm referring to the econometric evidence that, overall, each dollar of R&D credit leads to one dollar of increased R&D. Laura Tyson and I summarize the data in our report, under "Assessing the effectiveness of the corporate R&D tax credit". The report is freely available at http://www.americanprogress.org/issues/2012/01/corporate_r_and_d.html
It's not clear from your comment what level of management you deal with. We understand that project managers do not budget with the R&D credit in mind, but we have been told that top management at least sometimes takes it into account when setting an overall budget level for research spending.
The level of management I deal with are the CFO, VP Eng., Project Heads, Engineers, etc. I am very familiar with R&D project accounting and how budgets are developed and funded. I developed R&D tax credit procedures and documentation plus I defended it on audit with great success for a few well known companies. I know from my detailed experience that it is not correct when you say that the tax credit is part of the R&D budget at any level.
I also disagree with the study conclusion that "the credit is effective in the sense that each dollar of foregone tax revenue or tax expenditure for the credit causes business to invest at least an additional dollar in R&D.". One reason for my disagreement is that the data observed is not, as stated in the report, the "ideal
data" or "data that fall short of what would be needed for a more definite test." Please note that since about 2005, R&D for financial purposes has included the value of stock options which has been big for many companies which would have the reader believe there is additional dollar investments in R&D. Also, there was a court cases which provided that stock option exercises were considered wages for the R&D tax credit purposes which in turn increased the tax credit without additional dollar investments in R&D.
I have many other issues with this report. My feeling is that you are looking at the R&D tax credit from 50,000 feet and making definitive statements that do not add up based on what is happening on the ground. I believe the report was written to support a conclusion that was determined prior to gathering the data. I don't mean to be overly critical, but after reading the report this is my conclusion.
Thank you for taking the time to look at our report and to share more about your personal experience.
We had no prejudice about the credit before researching the report. We consulted the best studies (in terms of method) that are available and distilled our conclusion about the efficacy of the credit from those, combined with other qualitative inputs to which we had access.
A comments thread provides no opportunity to resolve the thorny question of why your ground-level observations do not seem to be reflected in the econometricians’ 50,000-foot flyover view. It is not unheard of for individuals to find that aggregate outcomes fail to reflect their personal experience. But as we are both aware, the data to study the credit are not what we would wish.
The data are nowhere near as recent as 2005, but thank you for your point about stock options. Salaries are the main part of R&D spending covered by the credit. Isn’t it appropriate to consider options in some way as part of the salary? In statistical terms, it would just be important to keep pre- and post-2005 data separate.
This will be my last communication.
Please note that the tables 2 through 10 refer to years including 2005 and subsequent years. Note the large increases in financial R&D reported which I believe is impacted a lot by the inclusion of stock options. The point I made was that stock options are not an R&D "spend". In many cases you compare R&D
"spend" for the period 1997 thru 2008. You have overstated R&D spend for 2005 and subsequent years. Your comparison is incorrect.
Your conclusion that "the credit is effective in the sense that each dollar of forgone tax revenue or tax expenditure for the credit causes business to invest at least an additional dollar in R&D" without correct data is outrageous even with the stock option issue.
When you see the world from 50,000 feet with rose colored glasses, you can not comprehend reality as experienced by people on the ground who live in the real world. What you have provided never proved your conclusion as stated above. In
all my years in this area I have never seen or heard a colleague state that a dollar of R&D causes business to invest at least an additional dollar in R&D.
In Silicon Valley, we do R&D to develop new and improved products and if the government wants to give a tax credit for something we would do anyway all the better, but we do not need conclusions based upon faulty inputs.
Excuse me. I made the mistake of thinking that you'd read the report, not glanced at the tables. The "at least a dollar-for-dollar" conclusion is based on the weight of evidence from the 11 econometric studies cited in Table 11, which use no data more recent than 1997. The other tables you reference did not in any way inform the conclusion that has you so upset.
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