NCPA - National Center for Policy Analysis

The Research and Development Tax Credit Suffers from Design and Implementation Problems

August 11, 2015

According to new research published by the Mercatus Center, eliminating the research and development (R&D) tax credit -- which is one of the largest corporate "tax expenditures" with an annual cost of more than $9 billion -- and lowering the corporate tax rate for all businesses would be a more effective way to support innovation. While it is intended to encourage economic growth by functioning as an incentive for investment in new and innovative technologies, it is poorly targeted. Small, start-up firms conduct some of the most socially beneficial research, contributing to long-term economic growth -- yet the credit is of limited or no use to them.

The study shows that the R&D tax credit is chiefly used by big businesses, providing them an advantage in the marketplace and disadvantaging small businesses. Findings in the study:

  • Most firms in the U.S. economy are small -- only a small fraction of firms take in over $5 million in receipts.
  • The largest 5 percent of firms claim 95 percent of all research tax credit dollars, while the four smallest firm categories (receipts less than $5 million), which make up 95 percent of all firms, claim just 5 percent of credit dollars.
  • Twenty-eight percent of the largest firms (i.e., firms with business receipts over $250 million) receive a credit -- compared to 1 percent of the four smallest firm classes.

The R&D tax credit is a prime example of policymakers' inability to target government programs to reap the promised benefits. Lowering the tax rate has been shown to encourage R&D investment and will help all businesses while increasing U.S. global competitiveness.

Source: Jason J Fichtner and Adam Michel, "The Research and Development Tax Credit Suffers from Design and Implementation Problems," Mercatus Center at George Mason University, August 5, 2015.


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