An Innovation Box for the U.S.? Congress Should Focus on Business Tax Reform Instead
September 1, 2015
Reforms in the business side of the current U.S. tax code are necessary to revive economic growth. Rather than attempting to lower business tax rates, Congress is discussing implementing an "innovation box." Called a "patent box" in Europe, innovation boxes offer lower taxes on specific types of intellectual property (IP) income. However, innovation boxes are difficult to properly construct and are insufficient replacements for sound policies such as a lower business tax rate.
Basic principles of an innovation box:
- Qualifying income from IP, such as patents, logos, copyrights, designs and trademarks, are grouped together either for a lower tax rate or a large income tax exemption.
- The remaining income is taxed at the current business tax rate.
- The incentive for businesses to sell IP to sister companies in low-tax countries would decrease, helping to maintain the U.S. tax base.
- European countries, U.K, Belgium, France, Hungary, Italy, Luxembourg, Netherlands and Spain, have all recently implemented innovation boxes.
Primary arguments against an innovation box:
- All business income should be taxed at the same rate.
- Innovation boxes are not a sound substitute for an overall lower business income tax rate.
- Businesses benefiting from an innovation box could inhibit future tax reforms.
- Better alternatives exist, such as moving to a territorial system.
- Innovation boxes are complicated and need well defined rules requiring years, not months to establish.
The United States currently has one of the highest business tax rates on the international market. Reforming business tax rates is necessary but it is premature and unwise for Congress to consider implementing an innovation box at this time.
Source: Curtis S. Dubay, "An Innovation Box for the U.S.? Congress Should Focus on Business Tax Reform Instead," Heritage Foundation, August 18, 2015.
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