Abstract
The R&E tax credit has never been effective and subsequent attempts to restructure it have not addressed the major deficiencies. Moreover, in the 25 years since the R&E tax credit was enacted, a steadily increasing number of countries have implemented or expanded competing tax incentives, which in many cases are better structured and larger in size. As a result, the relative impact of the US credit is now negative in terms of incentives to conduct R&D within the domestic economy. The inadequacy of the credit stems largely from its small size and its incremental format. The impact of an R&D tax incentive is affected by its scope of coverage, the ability of industry to take advantage of it over the entire R&D cycle, the magnitude of the incentive relative to other nations’ tax policies, and its ease of implementation. In the end, a tax incentive must sufficiently lower the user’s cost of R&D to overcome barriers to allocation of private-sector resources commensurate with the potential rates of return on such investments. As a policy instrument, a tax incentive for R&D should be most effective if its form is a flat rate applied to all R&D.
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Notes
Sawyer (2004).
An accurate assessment of the credit’s impact requires data on company-level R&D investment and the motivations for such investment. Only one study reviewed in the GAO report (1996) actually interviewed company R&D managers (Mansfield 1986) and this study found little impact of the credit on R&D portfolio composition.
These two countries have the second and third highest ratios of government R&D funding to GDP (OECD, Main Science and Technology Indicators, Vol. 2006/1).
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Adapted from Tassey (2007). The author is indebted to Gary Anderson for a number of helpful comments on a draft of this paper.
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Tassey, G. Tax incentives for innovation: time to restructure the R&E tax credit. J Technol Transfer 32, 605–615 (2007). https://doi.org/10.1007/s10961-007-9045-z
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DOI: https://doi.org/10.1007/s10961-007-9045-z