Overall, it is abundandly clear that the across-the-board cuts are bad policy and should be avoided if possible. As ITIF wrote in Taking on the Three Deficits, while budget cuts are a necessary piece of debt reduction, indiscriminate budget cuts that harms America’s ability to innovation and grow are far from rational economic policy. Hopefully, as the impact of the potential sequestration cuts becomes more clear, this will provide Congress the motivation it needs to act and create a more innovation-friendly budget.
Science and R&D
Winning the Race 2012 Memos
As the 2012 presidential campaign moves in the final stage, ITIF is presenting general principles and specific recommendation ideas across several policy areas we believe the next President and Congress should adopt to restore U.S. global competiveness and prosperity.
As chronicled in Innovation Economic: The Race for Global Advantage, the United States is losing its once formidable edge as an innovator. Many other nations are putting in place better tax, talent, technology and trade policies, and reaping the rewards in terms of faster growth, more jobs, and faster income growth. It’s not too late for the United States to regain its lead but it will need to act boldly and with resolve.
Week by week until the November election, the Winning the Race series will put forward creative yet pragmatic ideas in policies affecting taxes, trade, education, broadband, the digital economy, clean energy, science and technology and other areas. Taken as a whole, the series represents a new Innovation Consensus to replace the outdated Washington Consensus.
Memo One (September 3, 2012): Boosting Innovation, Competitiveness, and Productivity
Memo Two (September 10, 2012): Trade and Globalization
Memo Three (September 17, 2012): Corporate Tax
Memo Four (September 24, 2012): Digital Communication Networks
Memo Five (October 1, 2012): Traded Sector Industries
Memo Six (October 9, 2012): Digital Economy
Memo Seven (October 15, 2012): STEM Skills
Memo Eight (October 22, 2012): Clean Energy
Memo Nine (October 29, 2012): Science and Technology
Memo Ten (November 5, 2012): Overcoming the Barriers
Complete List of Policy Recommendations: Top Policy Recommendations for the Obama Administration to Help the United States Win the Race for Global Advantage
We’re #27: The United States Lags Far Behind in R&D Tax Incentive Generosity
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.