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R&D Tax Incentives: Growth Panacea or Budget Trojan Horse?

40 Pages Posted: 17 Oct 2016  

Stephen E. Shay

Harvard Law School

J. Clifton Fleming Jr.

Brigham Young University - J. Reuben Clark Law School

Robert J. Peroni

University of Texas at Austin - School of Law

Date Written: Spring 2016

Abstract

Research and development (R&D) activity has long held a privileged place in the U.S. income tax system and in policy debates. The premises for R&D tax incentives, however, are grounded in theory regarding a market failure for investment in R&D that does not align well with the target of U.S. R&D tax incentives. Moreover, factors contributing to innovation are now understood to include, in addition to R&D, other “knowledge-based capital” (KBC), investment in training and other human capital development, organizational processes, computer software, and architectural and engineering designs. The combination of existing R&D tax incentives, income shifting, and deferral of foreign income from U.S. tax, with intellectual property protection for successful R&D, result a poorly designed mix of overlapping benefits only loosely related to fostering innovation. Proposed “innovation box” tax incentives would add to the incoherence of the existing incentives. This article calls for a re-examination of U.S. R&D tax incentives under a framework that critically examines the scope of tax incentives and how they fit into an overall U.S. R&D and innovation incentive regime. The framework requires an evaluation whether R&D tax incentives address market failure or other nontax objectives, whether tax incentives are designed to efficiently achieve those objectives, and whether regulatory or direct expenditure alternatives would be more effective in achieving those objectives.

Suggested Citation

Shay, Stephen E. and Fleming, J. Clifton and Peroni, Robert J., R&D Tax Incentives: Growth Panacea or Budget Trojan Horse? (Spring 2016). Tax Law Review, Vol. 69, 2016. Available at SSRN: https://ssrn.com/abstract=2852766 or http://dx.doi.org/10.2139/ssrn.2852766

Stephen Shay (Contact Author)

Harvard Law School ( email )

1563 Manssachusetts Avenue
Cambridge, MA 02138
United States

J. Clifton Fleming

Brigham Young University - J. Reuben Clark Law School ( email )

430 JRCB
Brigham Young University
Provo, UT 84602
United States

Robert Peroni

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

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