The History of the R&D Tax Credit: A Smoking Gun from a Cold War

Posted: 12 May 2017 Last revised: 16 Jan 2020

See all articles by Mirit Eyal-Cohen

Mirit Eyal-Cohen

University of Alabama - School of Law

Date Written: May 12, 2017


Enacted in 1981 with a different title, the Research and Development credit was created as a temporary tax expenditure program meant to embolden innovation research in the U.S. Since its inception, the research credit has expired eight times and been extended seventeen times (six times retroactively). After more than three decades of extension and renewal, the research credit was made permanent in 2015.

The Article further analyzes dynamics that helped lock-in the research credit’s path to permanency. During the Cold War, trade organizations and business leaders expressed concerns of the lagging rates of investment in research activities compared to that of the Russian rivals. Accordingly, the Regan Administration created a temporary tax mechanism to compensate companies that increase their incremental investments in research activities. This unique ethos perpetuated and became central throughout the life of the research credit program. No politician wanted to be seen attacking the emergent high-tech industry and depressing research—the engine of job creation and economic growth. The research credit program also received patronage from an unusual trade alliance—the Research Credit Coalition. The Coalition was instrumental in cultivating and strengthening the importance of the program in American society, emphasizing that the temporary nature of the research credit contributed to uncertainty in its application and prevented firms from relying on its availability.

Critics of the R&D tax credit have argued that this temporary tax incentive defeats its purpose because it lacks eligible parties’ long-term economic decisions. Moreover, the credit complexity and multifaceted character make it difficult for younger entities to claim. As a result, the current R&D credit ($20 billion/year) and R&D expensing ($73 billion/year) are utilized mainly by firms with more than $250 million in receipts. The Article concludes with thoughts about the legal adaptation of path dependence theory and provides insights on other temporary provisions in the U.S. Code. It suggests abandoning the notion that temporary legislation encompasses all ills of the legislative process. Instead, it proposes to adopt new mechanisms and default rules to prevent the inefficient entrenchment of expiring provisions such as the research credit.

Keywords: Research and Development, Experimentation, Tax Credit, History, Innovation, Cold War

Suggested Citation

Eyal-Cohen, Mirit, The History of the R&D Tax Credit: A Smoking Gun from a Cold War (May 12, 2017). Available at SSRN:

Mirit Eyal-Cohen (Contact Author)

University of Alabama - School of Law ( email )

P.O. Box 870382
Tuscaloosa, AL 35487
United States

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