The Case for Improving America’s Research and Experimentation Tax Credit

When it comes to the advanced industries that drive the modern economy — industries like aerospace, biopharmaceuticals, computing, machinery, semiconductors, software, and the internet — America is no longer the undisputed leader. There is an intense race for global innovation advantage on all fronts, as not only China, but also many traditional U.S. allies have made surpassing us a centerpiece of their economic policies. At risk are good-paying jobs, U.S. competitiveness, and national security.

As Rob Atkinson explains in The Hill, among the key policy tools that America’s competitors have deployed to establish an edge in that competition are tax incentives for companies to invest in research and development. This is a case of the pupil outdoing the master, for the United States was the first country to establish an R&D tax credit in 1981. As recently as the mid-1990s, the United States maintained the most generous R&D tax incentive in the world. As scholarly studies have shown, that helped America stay ahead of its competitors by boosting R&D investment, innovation, jobs, and GDP growth.

Fast forward to today, and it’s a very different picture. Among the 30 OECD nations with more than 4 million people, plus the BRICs (Brazil, Russia, India and China), America’s R&D tax credit support ranks just 24th in its generosity. This is because other nations have realized the importance of R&D incentives and have either added them to their innovation policy tool box or expanded them. China’s R&D tax subsidy, for example, is 2.7 times more generous than America’s. Overall, the U.S. R&D tax subsidy rate is just 57 percent of the median rate of these other nations.