NCPA - National Center for Policy Analysis

Don't Let the R&D Tax Credit Slip Away

September 7, 2010

The research and development (R&D) tax credit reduces a firm's federal tax liabilities, based on the amount spent to develop a new product or improve existing products.  In 1981, the United States enacted the most generous R&D credit of any nation.  However, by 2010, 16 other nations had a more generous tax break, say Pamela Villarreal a senior policy analyst with the National Center for Policy Analysis and Michael Barba, a graduate student fellow with the National Center for Policy Analysis.

Expressing the value of the credit as a percentage of R&D spending, in 2006: 

  • Spain provided a 44 cent tax credit for each dollar spent on R&D.
  • Mexico provided a 37 cent tax credit per dollar of R&D spending.
  • Canada provided a 17 cent tax credit per dollar of R&D.
  • The United States' R&D tax credit, by contrast, resulted in only a 7 cent tax credit for each dollar spent.

With only modest domestic benefits to attract them, U.S. firms are voting with their feet.  Economist Robert Atkinson notes:

  • From 1998 to 2003, U.S. firms invested twice as much in R&D abroad as domestically.
  • As a result, R&D as a share of gross domestic product (GDP) slipped from 1.84 percent in 2000 to 1.67 percent in 2003.
  • Concerned about the budgetary impact of lost tax revenue, Congress has never made the credit permanent.

In the long run, the tax credit increases GDP by as much as $2.96 for each dollar of tax revenue lost, but a stop-and-go policy is less beneficial.  The R&D tax credit would contribute more to economic recovery and job creation if it were permanent, more generous and covered a wider variety of R&D, say Villarreal and Barba.

Source:  Pamela Villarreal and Michael Barba, "Don't Let R&D Tax Credit Slip Away," National Center for Policy Analysis, September 7, 2010.

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