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
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.
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.
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.
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.
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.
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.
(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.
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.
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.