Tax Policy

Benefits Of The Research And Development Tax Credit

The benefits to society of research and development (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.

Beginning in 1981, private companies were allowed a credit that reduced their taxes by 25 percent (currently 20 percent) of additional, qualified R&D they did each year. Studies 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.

  • A new Coopers & Lybrand study finds that over a 12-year period the credit stimulates additional productivity and economic growth, raising federal revenue by almost enough to pay for the credit -- that is, the dynamic revenue loss is just 35 percent of its static loss (see figure).

Considering that the social rate of return on R&D may be several times the private rate of return, the R&D tax credit is one of the most effective government programs ever enacted.

Unfortunately, the tax credit 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 this on-again/off-again approach has robbed the R&D credit of much of its effectiveness since firms often plan projects years in advance.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), March 16, 1998.

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