The Research and Experimentation Tax Credit: A Critical Policy Tool for Boosting Research and Enhancing U.S. Economic Competitiveness

The emergence of a “flat world” has meant that the U.S. economy faces new robust economic competitors, many that combine low costs and high tech. Indeed, as a growing number of nations have come to understand the link between technological innovation and increased prosperity, many not only encourage domestic firms to invest more in research, but also aggressively seek R&D investments by foreign, often American, technology companies. And key weapons in their economic arsenals are tax incentives for research.

As a result the United States faces a significantly different world than even 20 years ago. After President Reagan signed legislation creating the R&D tax credit in 1981 the United States had the distinction of providing the most generous tax treatment of R&D of all OECD nations. But because the generosity of the credit has been whittled away over the years, and other nations have forged ahead, by 2004 we had dropped to 17th most generous.

The Research and Experimentation Tax Credit (referred to here as the R&D tax credit) can play an important role in ensuring that the United States remains an attractive location for global companies to conduct research. Not only does the credit spur the retention and attraction of investment in R&D in the United States, new scholarly research shows convincingly that the credit is an effective tool for stimulating additional research which in turn leads to faster economic growth. As a result, legislation now before Congress to extend and expand (by adding the Alternative Simplified Credit) the credit is crucial to ensuring that the U.S. innovation economy continues to prosper and grow.