Tax incentives for innovation: time to restructure the R&;E tax credit |
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Authors: | Gregory Tassey |
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Affiliation: | (1) Program Office, National Institute of Standards and Technology, 100 Bureau Drive, Mail Stop 1060, Gaithersburg, MD 20899, USA |
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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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Keywords: | R& E tax credit Tax policy Innovation policy R& D policy R& D investment Innovation |
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