Opinion Editorial | |
| Monday, March 16, 1998 | |
Research and Development Tax Credit Pays for Itself |
Economists have known for a long time that research and development (R&D)
is critically important to long-term economic growth. They also know that
the benefits to society of R&D far exceed the profits that private companies
can earn on their R&D investments. That is because there are spillover
effects from new inventions, such as the transistor, that multiply their
benefits to society many times over. Therefore, it is in the interest of
society to encourage R&D even if it must be subsidized. In 1981, Congress enacted a tax provision designed to stimulate private
R&D. Companies were allowed a tax credit of 25 percent on incremental
R&D (currently 20 percent). That is, their taxes were reduced by 25
percent of the additional, not the total, amount of qualified R&D they
did each year. By applying the credit only to the annual increase in R&D,
Congress hoped to ensure that companies were not rewarded for what they
would have done anyway, but only for doing more. Studies of the R&D credit generally have found that it has increased
R&D exactly as it was supposed to. A 1995 report from Congress's Office
of Technology Assessment found that the credit stimulated $1 of new R&D
for every $1 of revenue loss. A 1993 study by economist Bronwyn Hall of
the National Bureau of Economic Research found $2 of additional R&D
for every $1 of revenue loss. When one considers that the social rate of
return on R&D may be several times the private rate of return, one has
to judge the R&D tax credit as one of the most effective government
programs ever enacted. Unfortunately, Congress has been unwilling to make a long-term commitment
to the R&D credit. It has never been enacted permanently and has expired
on several occasions. It is scheduled to expire again on June 30 of this
year. Economist Ken Brown of the National Science Foundation believes that
this on-again/off-again approach to the R&D credit has robbed it of
much of its effectiveness. Firms often plan R&D projects years in advance.
If they are not sure the credit will be available they may scale-back their
plans. A new study from Coopers & Lybrand may help Congress overcome its
reluctance and make the R&D credit permanent. It finds that over a
12-year period the dynamic revenue loss is just 35 percent of its static
loss (see figure).
That is, the additional productivity and economic growth
stimulated by the credit raise federal revenue by almost enough to pay for
itself. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
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