Why The Tax Reform Act of 2014 Should Expand, Not Cut, The R&D Tax Credit

April 14, 2014
| Reports

R&D is a key driver of U.S. productivity growth, innovation and competitiveness. However, relative to societally optimal rates companies underinvest in R&D, which is why since 1954 companies have been able to deduct R&D costs immediately rather than depreciating them, and why since 1981 companies have been able to take a tax credit for R&D expenditures. Unfortunately, the Tax Reform Act of 2014 proposed by House Ways and Means Chairman David Camp (R-MI) would not only significantly reduce tax incentives to invest in R&D but would disqualify R&D expenditures toward software development from the credit.

These changes, if enacted, would reduce the tax incentives for performing R&D in the U.S. by approximately $20 billion per year, raising the effective tax rate of R&D-performing companies. It would also reduce R&D performed in the United States by at least $25 billion annually, which would in turn reduce productivity growth by an estimated 0.18 percent per year going forward. Finally, eliminating the credit for R&D on software, an activity that many industries not just software engage in, would change the allocation of R&D across types of research, negatively impacting innovation. 

The United States cannot afford to be indifferent to where R&D is performed. Given the fact that 26 nations already provide more generous tax treatment of research, these changes will lead to relatively less global R&D being performed domestically, with the negative effects on the economy and jobs to follow. To be sure, America needs sensible reforms that lower corporate tax rates, but these steps should be taken while maintaining, or even expanding, proven incentives to invest such as the R&D tax credit.

Points to Consider Regarding Agriculture and Biotechnology

April 11, 2014
| Reports

Public discussions surrounding genetically modified foods and their impact on society and policy are often dominated by hyperbole and misinformation that hampers legitimate debate. To provide a clearer picture of the facts surrounding biotechnology and agriculture, ITIF presents a series of Points to Consider memos which analyze specific public statements surrounding GMOs, their accuracy and the implications for public policy.

Alleged Decline in GM Crop Plantings Misses Forest for Trees

False Claims About Pesticide Toxicity are Based on Discredited Methods

Organic and Conventional Milk are Nutritionally Indistinguishable

Flawed & False Arguments for Mandatory GM Food Labels

How ITA Expansion Benefits the Chinese and Global Economies

April 11, 2014
| Reports

The Information Technology Agreement (ITA)—which eliminates tariffs on trade in hundreds of information and communications technology (ICT) products—has been one of the most successful trade agreements undertaken, for the global economy, for ICT industries, and for the nations participating in the agreement. Perhaps no country has benefited from the ITA more than China, which has seen its global share of ICT exports increase from just 2 percent in 1996 (the year the ITA was chartered) to 30 percent in 2012. Yet as some 54 countries now work to expand the product coverage of the ITA (which has not been updated since 1996), China has thus far balked at concluding a comprehensive expansion that would include a range of advanced ICT products. But as this report explains, a robust expansion of the ITA is in both China's interest and that of the global economy.

Understanding U.S. S&T Competitiveness: Rethinking NSF's S&E Indicators Report

April 7, 2014
| Reports

For 42 years the U.S. National Science Foundation has been producing its biennial "Science and Engineering Indicators" report, and since 1998 it has included a chapter “Industry, Technology and the Global Marketplace.” The NSF report is seen by many as an unbiased source for where the United States stands in technology-based competitiveness. The media reports the findings and many in the economic and technology policy communities look to the report to assess how United States global technology-based competitiveness. So when the report concludes that, “The strong competitive position of the U.S. economy overall is tied to continued U.S. global leadership in many KTI [knowledge- and technology-intensive] industries,” and “The US has the highest KTI share of GDP of any large economy,” it is not unreasonable for official Washington to take this as a good housekeeping seal of approval that all is well and to view any calls of alarm regarding the state of U.S. tech-based competitiveness as the “boy crying wolf.” 

But while the NSF report contains valuable information, its analysis of U.S. technology-based economic competitiveness is seriously flawed and misleading. There are a number of problems. First, the report relies on an overbroad definition of KTI industries, most of which are neither in global competition or technology-based. For example, the fact that the health care and financial services industries have grown much faster in the United States than in our competitor nations is seen by NSF as evidence of U.S. economic competitiveness, when in fact it is just the opposite. Second, the report conflates the absolute size of sectors with U.S. national competitiveness. Third, the report measures output using dollar denominated exchange rates which makes accurate international comparisons difficult. And fourth, the report fails to provide sufficient transparency for much of its key data, preventing outside analysts from knowing exactly what is included and excluded in the NSF analysis.When these first three limitations are controlled for the result is actually quite different than the official NSF findings. In fact, U.S. science and technology-based (S&T) competitiveness has declined significantly as other nations have put in place policies to make gains while the United States has not.

If the NSF is going to provide accurate and useful analysis of science and technology data related to U.S. competitiveness, it would be well served to significantly restructure the makeup and structure of the analysis in this key chapter to focus solely on science and technology-based, globally traded sectors. Doing so will provide policy makers with a more accurate assessment of the true competitive position of the U.S. S&T-based economy

Choosing A Future: "The Second Machine Age" Review

April 4, 2014
| Reports

In Issues in Science and Technology, Atkinson reviews "The Second Machine Age" by MIT professors Erik Brynjolfsson and Andrew McAfee. "The Second Machine Age" is the latest example of a wave of “innovation optimist” writing that holds that technological change is accelerating, leading to vast new innovations and profound transformation.  But Atkinson argues that the evidence does not warrant such utopianism. Moreover, the authors’ continued fanning of the flames of neo-Luddite fears of wide-scale job loss from innovation not only are not borne out by history or analysis, they encourage the public and policy makers to want to slow, rather than accelerate innovation. 

Assessing U.S. Corporate Tax Reform in an Age of Global Competition

March 24, 2014
| Reports

Over the past two decades other nations have steadily lowered their corporate tax rates to the point where the United States now has the highest statutory rate in the world.  But we also have a very high effective rate relative to our competitors.  Moreover, unlike most nations, the United States taxes companies on world-wide income. To top it off, we ranks 27th in the generosity of our research and development tax credit. This report explains the basic issues involved in tax reform and documents how the United States has fallen behind in the global competition to attract and retain business activity. It summarizes the growing literature on the link between tax rates and investment and economic growth as well as the effectiveness of the R&D tax credit in incentivizing additional private research with large social spill-over benefits. Corporate tax reform is one of the most important things Congress can do to grow the economy.

The report makes the following points and recommendations:

  • The United States faces intense competitive pressure in keeping and attracting corporate investment and the jobs that come with it. This new competition limits the degrees of freedom policymakers have in crafting corporate tax policy.

  • Both U.S. statutory and effective corporate tax rates are significantly higher than those of most other countries.

  • The current policy of taxing the worldwide profits of U.S. companies puts them at a disadvantage when competing for world markets.

  • Although lowering the statutory rate is important, it is even more important to lower the effective rate. This is best done by expanding the few tax provisions, such as the R&D tax credit and accelerated depreciation, which clearly cause companies to expand investment, while also lowering the statutory rates.

  • Congress can pay for a reduction in the effective corporate tax by raising taxes on the individual side, through means such as a carbon tax, a value added tax, and/or taxing dividends, carried interest, and capital gains as normal income.

Why India’s PMA Will Harm the Indian and Global Economies

March 17, 2014
| Reports

Despite contentions that India’s Preferential Market Access (PMA) policy—which enacts local content requirements in public procurement of electronics and information and communications technology (ICT) products in India—is a temporary, limited, and non-distortionary measure designed to give a slight and momentary boost to domestic electronics and ICT hardware manufacturers, the reality is that the PMA is a highly distortive policy which threatens to damage both on India’s and the broader global economy. India’s PMA:

 1. Is trade-distortionary, entailing at least a de facto price and/or quality preference which will have significant negative effects on Indian citizens;

2. Far from making ICT products in India more secure, is actually likely to make them less secure; 

3. Will damage global trade and contribute to spillover and contagion effects reducing global trade and economic integration;

4. Is distinct and more severe than many other countries’ preferences for domestic production in government procurement activity;

5. Is unlikely to have any significant long-term effectiveness as an instrument to bolster domestic manufacturing, while in fact distracting Indian policymakers from enacting the kinds of policies they really should be undertaking to enhance the competitiveness of India’s economy and manufacturing industries.

Designing a Global Trading System to Maximize Innovation

March 6, 2014
| Reports

In an article for the peer-reviewed journal Global Policy, Robert Atkinson argues that major reforms are required to maximize global innovation.  Innovation industries are different than other industries and because of these differences maximizing the production of innovation globally requires the presence of large markets, limited “artificial” competition, and strong IP protection. The article lays out a policy agenda to enhance these conditions.

Federally Supported Innovations

February 3, 2014
| Reports

The report examines 22 cases of successful U.S. innovation in which the development of key foundational technologies stemmed at least in part from federal investment in research and development (R&D). The cases cover technologies developed across a wide range of fields over the past half century, from information and communications technology, energy, and healthcare to transportation, agriculture, and mathematics. The report explains how federal support for R&D is critically important to today’s innovation system, including because of its investment in research and in technologies too far from market for the private sector to invest in, and because federal investment in R&D complements and spurs additional private sector R&D investment. It concludes by arguing that if the United States wishes to regain the world lead in terms of innovation (as a share of its economy) it will need to expand, not contract, federal support for R&D, which means reversing the sequestration cuts to federal R&D scheduled to return in FY 2015.

100 Data Innovations

January 23, 2014
| Reports

Businesses, government agencies, and non-profits in countries around the world are transforming virtually every facet of the economy and society through innovative uses of data. These changes, brought about by new technologies and techniques for collecting, storing, analyzing, disseminating, and visualizing data, are improving the quality of life for billions of individuals around the world, opening up new economic opportunities, and creating more efficient and effective governments. This list provides a sampling, in no particular order, of some of the most interesting and important contributions data-driven innovations have made in the past year.