To Boost U.S. Productivity and Competitiveness, Congress Should Expand the R&D Tax Credit, Not Reduce or Eliminate It to “Pay For” a Lower Corporate Rate, ITIF Concludes in New Report

July 5, 2017

WASHINGTON—The United States continues to lose ground to other nations when it comes to providing tax incentives for the kind of research that drives innovation, productivity, and competitiveness, according to a new report from the Information Technology and Innovation Foundation (ITIF). To remedy this, ITIF, the country’s leading science and tech policy think tank, today urged Congress to significantly expand the R&D tax credit as part of any corporate tax reform initiative.

“The United States was the first country to introduce a research tax credit, but now it has dropped far behind many of its competitors,” said Joe Kennedy, a senior fellow at ITIF and the report’s lead author. “America has gone from having the most generous research credit of its kind to lagging in 25th place among OECD nations when you measure how supportive countries’ tax codes are for companies that invest in R&D. This has far-reaching implications for innovation, productivity, and competitiveness and the good jobs that follow, because R&D tax incentives influence not just how much R&D companies perform, but where they perform it. If it costs more here, then they could go somewhere else.”

To reestablish U.S. leadership in encouraging research, ITIF proposes lowering the corporate rate while expanding the R&D tax credit’s Alternative Simplified Credit rate from 14 percent to 20 percent—thus allowing companies to recoup more of what they spend on qualifying R&D.

ITIF’s report argues it would be a serious mistake for Congress to reduce or eliminate the R&D tax credit to “pay for” a lower corporate rate.

“The main purpose of tax reform should be to encourage economic growth by lowering the effective tax rate for investment,” said Kennedy. “There are certainly some corporate tax loopholes that distort the economy, and closing them would be a way to ‘pay for’ some of the static revenue loss from lower corporate rates. But not all special tax provisions are created equal. Some increase economic welfare by correcting clear market failures—and the R&D tax credit is perhaps the most important of these.”

ITIF’s research finds that increasing the value of the R&D credit from 14 percent to 20 percent would have widespread benefits, including:

  • Creating 162,000 jobs;
  • Generating 3,850 additional patents per year;
  • Increasing productivity by 0.64 percent; and
  • Boosting GDP by $66 billion per year.

“In the 35 years since Congress enacted the R&D tax credit, other countries have slashed their corporate tax rates and created their own, often very generous, research incentives,” said Kennedy. “Expanding the R&D tax credit is completely compatible with simplifying the tax code and lowering the corporate tax rate, and would help accomplish the most important goal of tax reform, which is to spur innovation and growth. If the U.S. is to lead the world in R&D in the coming decades, then Congress has to lead by expanding this tax credit in the coming months.”

Read summary. | Read report. (PDF)