Taxes

Patent Boxes: Innovation in Tax Policy and Tax Policy for Innovation

October 4, 2011
| Reports
This report explains a tax device known as a patent box is being adopted by many countries seeking to enhance their competitiveness and why it would be a good policy for the United State to implement. A patent box significantly reduces the corporate tax rate on revenue from qualifying IP, based in part on the extent to which corresponding R&D and production is conducted domestically. The report survey the experience other countries have had with patent boxes and explains that a special, low rate would provide firms with a much stronger incentive not only to innovate but also to produce in the United States.

Download FAQs about Patent Boxes (PDF)

An effective corporate tax system reflects current economic realities. As such, the U.S. corporate tax system is in need of reform, for it reflects economic realities of a generation ago. Today, the U.S. economy faces intense global competition for economic advantage, particularly in innovation-based, higher wage industries. Moreover, the economy is based more on innovation and intellectual property (IP). IP is also more mobile, as companies can perform R&D and patent in countries around the world. Therefore, nations that hope to grow and attract innovation-based business establishments need tax policies that promote both the conduct of research and its commercialization.

Toward that end, a number of countries recently have adopted or expanded R&D tax incentives as well as developed new tax incentives to spur the commercialization of that R&D. These incentives or “patent boxes” (so-called because there is a box to tick on the tax form) allow corporate income from the sale of patented products to be taxed at a lower rate than other income. Eight nations (seven in Europe) have enacted patent box regimes that incentivize firms to patent or produce other related innovations. And a ninth, the UK, is set to put in place the incentive in 2013.

Proponents of patent boxes argue that they increase country competitiveness not only by spurring firms to invest more in innovation but also by providing a more competitive corporate tax climate for increasingly innovation-based firms. Skeptics claim that patent boxes do not actually address market failure because firms already have all the incentives they need to commercialize innovation in the marketplace.

This report seeks to inform the debate on whether patent boxes can help promote R&D and commercialization and if a patent box is appropriate for the United States. It articulates two economic rationales for why the United States should follow our European and Asian competitors and institute a patent box system. First, a patent box reduces the financial risk involved in innovation, better matching firm rewards with societal benefits, including the creation of high-wage jobs. If a patent box is designed in a way that links the incentive to the conduct of R&D and production of the patented product in the United States, it would go even further in spurring the creation and location of more innovation-based jobs in the United States. Second, a patent box would lower the effective corporate tax rate for knowledge-based establishments located in the United States, making it easier for them to compete against establishments in nations providing robust innovation incentives.

A patent box that significantly reduces the corporate tax rate on revenue from qualifying IP, based in part on the extent to which corresponding R&D and production is conducted domestically, would provide firms with a much stronger incentive to innovate and produce in the United States.

As such, Congress should establish a patent box regime modeled after those of other nations, allowing companies in the United States to pay a significantly lower rate on corporate income from patented products where the share of profits that are taxed at the lower rate depends on the extent to which related R&D and production is conducted within the United States.

Congress should establish a patent box regime modeled after those of other nations, allowing companies in the U.S. to pay a rate of 17.5 percent on corporate income from patented products.

One of the most interesting developments in the race for global competitiveness are what as known as patent boxes. If a patent box is designed in a way that links the incentive to the conduct of R&D and/or production of the patented product in the United States it would go even further in spurring the creation and location of more innovation-based jobs in the United States. Second, a patent box would lower the effective corporate tax rate for knowledge-based firms located in the United States, making it easier for them to compete against other firms in nations providing robust innovation incentives.

Are Investment Incentives Necessary in Corporate Tax Reform?

September 27, 2011 - 12:00pm - 1:30pm
Russell Senate Office Building
Constitution Avenue and 1st Street NE
Kennedy Caucus Room (Russell 325)
Washington
DC
20001

There is growing interest in the issue of corporate tax reform as a way to boost economic growth and U.S. international competitiveness. While any comprehensive tax reform involves a multitude of issues, one important issue is the extent to which a reformed tax code should include, or even stress, specific incentives to shape corporate behavior. Read more »

Are Investment Incentives Necessary in Corporate Tax Reform?

September 27, 2011
There is growing interest in corporate tax reform as a way to boost U.S. international competitiveness.

There is growing interest in the issue of corporate tax reform as a way to boost economic growth and U.S. international competitiveness. While any comprehensive tax reform involves a multitude of issues, one important issue is the extent to which a reformed tax code should include, or even stress, specific incentives to shape corporate behavior. The American Action Forum, the Tax Policy Center, and the Information Technology and Innovation Foundation held an important debate on the key issues facing policy makers.

See video

Creating Jobs: No Shortage of Ideas How To Do It

ABC News
Rob Atkinson argues that merely by expanding the federal R&D tax credit, some 162,000 new jobs could be created in the near term.

Tech Group on Tax Reform: Simpler Doesn't Always Mean Better

The Hill
A new ITIF report contends that the U.S. tax code should promote investments that enhance innovation and competitiveness.

What Would Pro-Growth Corporate Tax Reform Look Like?

July 19, 2011 - 8:30am - 9:45am
Rayburn House Office Building
45 Independence Ave SW
Room B340
Washington
DC
20515

There is a growing consensus in Washington that now is the time for comprehensive corporate tax reform. Such reform, if enacted, could easily be the most important economic policy decision Washington makes over the course of the next few years and its effects would likely have long term and important implications for the future health of U.S. Read more »

U.S. Corporate Tax Reform: Groupthink or Rational Debate?

July 19, 2011
| Reports
The United States is at risk of losing its global competitive advantage and with it faster per-capita income growth. To effectively respond, the nation must take concerted and strategic actions in a host of areas, including reform of the corporate tax code to transform it into a more effective tool to support private sector efforts to innovate and be more productive.

There is a growing consensus in Washington that the time has come for comprehensive corporate tax reform. Such reform could be the most important economic policy decision Washington makes. Its effects would likely have critical implications for the health of the U.S. economy for years to come.

While there are a range of issues any comprehensive tax reform package will have to address (including how foreign source income is taxed and the differential tax treatment of interest vs. dividends) this report addresses just two central issues:

  1. the extent to which reform should be focused on broadening the base and reducing so-called tax “distortions” on strengthening tax incentives to drive certain types of corporate investments; and
  2. the extent to which reform should be revenue neutral or cost revenue (at least in the short term) in order to lower the effective U.S. corporate rate.

If Washington is to get this right, the debate over corporate tax reform needs to be vigorous and informed by analysis and reason. Unfortunately, much of what passes for corporate tax reform policy analysis is nothing more than ideological assertions and Washington groupthink. Even among groups with differing ideologies, there is near universal belief in tax code simplicity. For example, the notion that the best tax code is one that is neutral and “doesn’t pick winners” is so widely touted that it has become conventional wisdom, is no longer even questioned and crosses party lines. Case in point, the Obama Administration’s Economic Recovery Board report on tax reform which stated: “The combination of a high statutory rate and numerous deductions and exclusions results in an inefficient tax system that distorts corporate behavior in multiple ways.” The issue of revenue neutrality is also confined by groupthink and ignores a significant body of academic research about the effects of taxes on corporate behavior. Anyone with the temerity to argue that simplicity should not be the main goal of corporate tax reform (and that the effective corporate rate needs to be lower) runs the risk of being treated with derision and disdain.

This report argues that this conventional wisdom is wrong and that if corporate tax reform follows the path laid down by the holders of the Washington economic consensus the result will be less growth, fewer jobs and reduced U.S. economic competiveness. In a world of intense international economic competition and a U.S. economy increasingly powered by innovation, a tax code that does not proactively “distort” the investment decisions of enterprises in the United States is one that is doomed to leave the United States behind in international competition. In fact, we are virtually the only nation in the world where the consensus is for eliminating, rather than expanding, incentives for business investment in innovation, capital equipment and machinery.

Rather, than a tax code that is based on the belief that Washington does not need to actively shape the structure and performance of the U.S. economy, the United States needs a corporate tax code that achieves three key things:

  1. provides direct incentives for U.S.-based enterprises to invest in the building blocks of innovation, productivity and competitiveness: research and development and innovation commercialization, workforce training, and machinery and equipment (including computers and software);
  2. taxes firms in internationally traded industries at a lower rate than firms in non- traded industries; and
  3. lowers the average effective corporate tax rate from its current levels.

Unfortunately, the conventional wisdom on tax reform, if followed, would lead to none of this. It would likely cut, not expand, key incentives that spur enterprises to invest more in the building blocks of growth and competitiveness, including the three most “costly” incentives, the deduction for domestic production, the R&D tax credit and accelerated depreciation. However, these are among the most pro-growth in the tax code. Reform would also likely raise taxes on traded sectors (sectors that compete globally such as vehicle production as opposed to those that do not such as barbershops) relative to their current rates (while lowering taxes on non-traded sectors), making them even less competitive than their competitors in other nations. And finally, if it is revenue neutral it would do nothing to lower the overall level of corporate taxation, thereby failing to address a key U.S. economic competitiveness challenge. American workers deserve better. At the very least, they should know that policymakers have heard and fairly considered all relevant arguments before deciding on a new tax policy.

Corporate Tax Reform Report Takes on Simplification Consensus

WASHINGTON – A simpler corporate tax code could be an anti-competitive, slower-growth tax code, warns a report released today by the Information Technology and Innovation Foundation.

With the Obama Administration and Congressional leaders possibly looking to eliminate a variety of corporate tax breaks as part of an eventual debt and deficit reduction plan, the report, “U.S. Corporate Tax Reform: Groupthink or Rational Debate,” warns this approach could undermine U.S. competitiveness and long-term economic growth. Read more »

What Would Pro-Growth Corporate Tax Reform Look Like?

July 19, 2011
Video and audio from the event.

There is a growing consensus in Washington that now is the time for comprehensive corporate tax reform. Such reform, if enacted, could easily be the most important economic policy decision Washington makes over the course of the next few years and its effects would likely have long term and important implications for the future health of U.S. economy. In this event, American Action Forum and ITIF host a discussion of how corporate tax reform can help drive U.S.

See video
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