Corporate Tax Reform for the New Innovation Economy

Washington, DC – The Information Technology and Innovation Foundation (ITIF) will host an event tomorrow at the Russell Senate Office Building to examine the need to reform the U.S. corporate tax code, based on a new ITIF report, Effective Corporate Tax Reform in the Global Innovation Economy. Read more »

Effective Corporate Tax Reform in the Global Innovation Economy

July 19, 2009
| Reports

There is increasing interest in reforming the corporate tax code, including a proposal by the Obama administration to, among other steps, limit deferral of foreign source income. However, there is little agreement on what that reform should look like.

A new ITIF report, Effective Corporate Tax Reform in the Global Innovation Economy, examines the issue of corporate tax reform and lays out six key principles for policymakers to consider as well as specific policy recommendations for crafting an innovation-based corporate tax code. These principles are:

  • Principle 1: Differentiate between individual taxes and corporate taxes and focus on making the individual tax code more progressive.
  • Principle 2: An effective corporate tax code is neither simple nor neutral.
  • Principle 3: An effective corporate tax code should explicitly spur innovation and productivity.
  • Principle 4: Nations need competitive corporate tax systems in a global economy.
  • Principle 5: Tax reform should shift revenue collection from mobile sources of economic activity toward immobile ones.
  • Principle 6: Recognize that international tax competition is here to stay.

Based on these principles, the report three key policy recommendations.

  • Recommendation 1: Significantly expand the research and development tax credit, by expanding the Alternative Simplified Credit, broadening the definition of qualified R&D to include “process R&D”, and creating a more generous credit for research conducted by companies at universities and federal labs.
  • Recommendation 2: Create a “knowledge tax credit” by allowing company expenditures on employee training to qualify for the Alternative Simplified R&D Credit.
  • Recommendation 3: Allow companies to expense in the first year expenditures on capital equipment instead of having to depreciate it over a number of years.

Reforming the code this way would not only make the United States more competitive in the global economy, but would also spur investment in the building blocks of the growth: research, workforce training, and new capital equipment.

Wireless Taxation, Economic Growth and Economic Opportunity

June 9, 2009
| Testimony and Filings

In a testimony before the Judiciary Subcommittee on Commercial and Administrative Law, Rob Atkinson discusses why discriminatory taxes on wireless services have a negative impact on economic growth and innovation. Dr. Atkinson explains, at minimum, any given tax should not: 1) significantly change consumer behavior, 2) be borne predominately by low-income consumers or households; and 3) inhibit economic growth—and a discriminatory tax on wireless services would violate all three principles.

Numerous studies have shown consumers use of wireless services are significantly impacted by price. Indeed, for every one dollar in tax on wireless services reduces consumption by of these services by $1.29. And because low income households are almost as likely to subscribe to wireless services as higher income households, a tax on wireless services would constitute a regressive tax. Finally, because wireless services create what is called a “network effect”—where the benefits wireless are an increasing function of the number of users—efforts such as a discriminatory tax that reduce the number of users necessarily reduce the value of wireless services for all those involved.

Stimulus and Investment Effects of Temporary Reduced Taxes on Repatriation

January 30, 2009 - 9:00am - 11:00am
U.S. Capitol
Room SC-4
Washington, DC

Under current tax law, U.S. companies can defer the U.S. tax on the profits earned by their foreign-based subsidiaries until they transfer those profits back to the parent company here in the United States. The result is that some $1 trillion in the profits of U.S. companies remain abroad, especially profits earned in countries with low tax rates. Read more »

An Innovation Economics Agenda for the Next Administration

September 24, 2008
| Reports

In today’s economy, innovation – the development and adoption of new products and services, more efficient production process­es, and new business models – is the most important factor driv­ing increases in American standards of living. By putting innovation at the center of our nation’s economic policies, we can ensure robust economic growth and rising standards of living for all Americans. ITIF’s Innovation Economics Agenda for the Next Administration lays out eight key recommendations to spur innovation-led economic growth in the United States. Amongst others, these measures include: significantly expanding the federal R&D tax credit, allowing companies to expense new investments in IT in the first year, creating a National Innovation Foundation, and reforming patent and trade policies.

Pro-taxes or pro-Internet?

October 17, 2007
| Blogs & Op-eds

Rep. Anna Eshoo (D-CA), Rob Atkinson (ITIF), and James Gattuso (Heritage Foundation) argue for the need to make permanent the ban on Internet access taxes in The Hill.

Expanding the R&E Tax Credit to Drive Innovation, Competitiveness and Prosperity

July 24, 2007
| Reports

The research and experimentation (R&E) tax credit has long been the subject of criticism. Some argue that if the goal is more research and innovation, it’s better to increase direct federal funding of research. Others argue that the credit is not effective, that companies would do the research in any case. Some object the very notion of using tax policy to influence private sector behavior, preferring instead a more ‘‘neutral’‘ tax code. Still others point to what they see are a host of design flaws in the current credit, including that its incremental nature reduces its effectiveness.

I argue here that most of these arguments are mistaken. To promote innovation in a global economy both direct funding and indirect tax incentives are needed. The credit, while it can be improved, has been shown to be effective in stimulating research. Moreover, far from distorting the market, the credit corrects for a market failure where firms are unable to capture all of the benefits of corporate research, leading them to under invest in research. Finally, while reform and expansion are needed, it would be a mistake to shift to a completely flat credit. However, several important changes should be made including doubling the current value of the credit, modifying the Alternative Simplified Credit to become incremental, and expanding the flat credit forcollaborative R&D.

The Case for Tax-Free Internet Access

June 17, 2007
| Reports

The Internet Tax Freedom Act (ITFA) has reduced the cost of Internet access, spurred investment in the digital economy, and contributed to nine years of economic growth. However, the ITFA will expire in November 2007 unless Congress takes action. We recommend Congress:

  • Make permanent the current moratorium on Internet access taxes and multiple and discriminatory taxes;

  • Eliminate the grandfather clause which allows certain states and local jurisdictions to impose taxes on Internet access; and

  • Clarify that the ban on taxes for Internet access includes the underlying transport services acquired by ISPs and does not include non-incidental services such as subscription video services.

Congress should continue to prohibit taxes on Internet access for the following reasons. First, Congress should make the moratorium permanent as part of a national strategy to encourage broadband adoption. While the benefits of broadband are well known, the United States has fallen behind in its broadband adoption compared to other countries. Among 30 OECD countries, the United States has dropped in rank for broadband adoption from 4th place in 2001 to 15th place in 2007. Making the moratorium permanent would eliminate another barrier to broadband adoption and help ensure the United States remains competitive in the global digital economy.

Second, Congress should make the moratorium permanent because tax free Internet access is a national issue that should be resolved at the federal level. While states also benefit from higher levels of Internet adoption, there is an asymmetrical distribution between the costs and benefits of taxes on Internet access. When states tax Internet access, they receive all of the financial benefit of the tax, but the net social cost of lower rates of Internet access extends beyond the states’ borders to affect the entire nation. States that continue to tax Internet access under the grandfather clause are essentially free riders that happened to get “lucky” by imposing a tax on Internet access before 1998.

Some critics have tried to make this debate into a states’ rights issue; however, the cost, speed, and availability of Internet access should be a national priority. Internet access is not a luxury service for most Americans, but rather is a key enabler of commerce, education, government services and civic participation. For example, the federal government has undertaken a significant initiative to expand its e-government services, and barring taxes on Internet access would help ensure that all Americans can afford to access these services. In addition, high speed Internet access is a fundamental building block for increasing productivity and growth in the national digital economy.

Broadband in particular creates many opportunities for businesses to operate more efficiently. For example, broadband enables companies to allow their employees to telecommute, which creates a more efficient workforce. Companies save money on office space and equipment, and employees save on commuting costs and time. These efficiencies translate into lower prices for consumers. The fact that some companies and federal agencies pay for all, or a portion, of many employees’ broadband connections is evidence of the importance of broadband for business. Broadband also creates opportunities for consumers to take on the role of the producer by substituting their own work for services they previously paid for. For instance, consumers have replaced travel agents, tax preparers, and bank clerks with online ticketing, online tax preparation, and online banking. This reduces costs for companies by allowing them to deliver goods and services more efficiently to consumers and at lower prices.

As Internet-enabled consumers conduct more business activity over the Internet, Internet access itself has become a key input to production, much like machinery. State tax policy should reflect the fact that Internet access is not merely a consumer good, but rather a tool used by producers to increase economic efficiency and lower the cost of production. Investment in machinery has also been strongly associated with economic growth and increased productivity. As a result, almost every state offers some form of a sales tax exemption on the purchase of new equipment. Since states already support these tax incentives, they have little reason to deny these tax benefits to investments in Internet access. Ultimately states will benefit as higher levels of productivity generate lower prices for their citizens. In addition, the economic benefits of a healthy national economy will provide state tax administrators opportunities to increase their state tax revenue.

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