With the U.S. unemployment rate stuck at over eight percent, one would expect a laser-like focus in Washington on simple tools that would increase growth. One key tool is the federal R&D tax credit: increasing the rate of the Alternative Simplified Credit (ASC) from 14 to 20 percent would increase annual GDP growth by $66 billion and create at least 162,000 jobs. Yet despite its efficacy, the United States continues to fall behind other nations in the generosity of its R&D tax incentive. Other countries, including Brazil, Canada, China, France, and India, have implemented R&D tax incentive schemes that far exceed that of the United States in generosity. In fact, in 2012, ITIF estimates that the United States ranks just 27th out of 42 countries studied in terms of R&D tax incentive generosity, down from 23rd just five years ago.
This statistic is unmistakable and troubling. The United States was first nation to realize the importance of spurring R&D through the tax code, putting in place the R&D credit in 1981. As a result, the United States experienced an R&D stimulus that helped drive robust economic growth through the 1980s and 1990s. Yet, while proposals for increasing the R&D tax credit have come and gone—including most recently President Obama’s call for a slight increase of the ASC to 17 percent—what was once the most generous R&D tax incentive in the world has now become one of the least generous. This means that when firms look for countries in which to invest in R&D, many other nations have a distinct, and in many cases, large tax advantage over the United States.
In a globalized world where innovation is the key to competitive advantage, firms within United States are less able to gain global market share in technology-based industries and new areas of growth. The result: stagnant economic growth and persistent unemployment—precisely the symptoms we see today. Without R&D tax incentives, companies will not conduct enough R&D, and thus society is worse off without R&D tax incentives.
