Taxing Patent Value Is a Patently Bad Idea

The U.S. Department of Commerce is reportedly exploring charging patent holders between one and five percent of a patent’s overall value to raise “tens of billions of dollars” to cover America’s budget deficit. This idea—effectively a tax—would represent a radical departure from the current system, whereby the federal government collects a modest maintenance fee to fund the U.S. Patent and Trademark Office (USPTO) and other agencies responsible for evaluating and granting patents. Taxing patents themselves would disincentivize innovation, harming America’s competitiveness, while not even getting close to remediating America’s fiscal imbalances. If the U.S. government wants to address deficits, it should do so through sound fiscal and budgetary strategies rather than creating new revenue sources detrimental to American competitiveness.

The intellectual property rights (IPR) system constitutes the backbone of the American innovation system. IP rights form part of a company’s intangible assets that allow it to profit from new ideas and products. Patents protect innovators from having their inventions copied without permission, allowing them the temporary right to exclude others from profiting from their technology, thus offering a low-cost, reliable way to encourage innovation by preventing easy imitation.

Even though the U.S. patent system was developed on these principles over the past two centuries, the U.S. government is now seeking out new revenue sources to cover its deficits. In addition to raising the cost of protecting innovations, this proposal would open the door to a recurring tax on patent holders that might grow subject to the whims of Congress or the size of the budget deficit.

Aside from the challenges posed to innovators, a tax like this would be nearly impossible to implement. Patents are granted for new ideas or technologies whose value is mostly unknown at the time. And, in many cases, one can’t know what a patent is worth until one ascertains how the product performs commercially. So how would the tax work? Would it be a one-time fee when the patent is granted, or an ongoing tax based on the value the patent creates over time? And even then, how would one figure out how much of that value comes from the patent itself versus things such as design, branding, user experience, or a smart business model? Either way, this tax represents a highly speculative venture, and if enforced, it would only prevent innovators from earning the profits needed to reinvest from one generation of innovations to the next. Therefore, such a tax would undermine the foundation of America’s leading innovation system.

A tax based on the stock of wealth, meaning a patent’s estimated value, would harm American competitiveness by placing the greatest burden on startups. These firms often have little revenue or operate at a loss, and would be forced to pay taxes on the uncertain "paper value" of a patent rather than on actual economic activity. Ultimately, startups would be compelled to plan activities mainly focused on raising liquidity to cover the value of their patents instead of concentrating on research, growth, and scaling. In contrast, large companies holding many patents would likely have the resources and incentives to reduce their tax burden by reorganizing ownership, keeping only narrower or complementary U.S. patents, and licensing them back from foreign affiliates. But, overall, it’s likely that more firms would focus time and resources on avoiding or mitigating the tax instead of devoting those resources to pursuing breakthrough innovation.

This proposal also violates one of the core principles of fiscal responsibility: “Do not fund flows with stocks,” which is precisely what the U.S. government seems to be attempting by taxing the value of an asset (i.e., the patent) to fund a recurring negative flow (i.e., the continued budget deficit). In other words, this idea replaces one bad budgetary practice of running a recurrent deficit with another one.

Lastly, user fee-based systems have worked very well for the United States. For example,through the groundbreaking Prescription Drug User Fee Act (PDUFA), companies pay fees for safety and efficacy evaluations of drugs that sustain the U.S. Food and Drug Administration’s (FDA) operations. This has allowed the FDA to support the hiring of needed experts capable of keeping up with the pace of biomedical innovation. Further, the FDA has accelerated its review time for new drugs from nearly three years in the mid-1980s to about 10 months, with no decrease in safety. User fees have been an indispensable component of America’s successful drug regulatory system, helping support the USPTO with expert staffing (i.e., of patent examiners) that has significantly reduced patent review backlogs that stretched into multiple years.

James Madison put it plainly: “The right to useful inventions... belongs to the inventors.” Patents have fueled American innovation for centuries. If policymakers are serious about sustaining U.S. leadership, they should focus on responsible budgeting—not dismantling a proven system that drives progress.