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Although Congress made permanent the research and development (R&D) tax credit in 2015, the federal government and states still can do more to encourage firms to increase their investments to improve products, create more efficient processes, and discover new scientific knowledge—key drivers of productivity and economic growth.
The federal R&D tax credit currently allows U.S. firms to claim up to 20 percent of their R&D expenditures against their taxes. State R&D tax credits come on top of this, providing further incentives for companies to innovate. And if the federal and state governments were to offer more generous R&D tax credits, then investments in R&D would increase even more.
Two Italian economists have analyzed corporate tax forms across 20 U.S. manufacturing industries between 1975 and 2000. They find that a 10 percent increase in R&D tax credit generosity permanently increases labor productivity by 0.4 percent per year. For reference, labor productivity in U.S. manufacturing grew by an average 0.8 percent annually between 2011 and 2015.