The History of the R&D Tax Credit: A Smoking Gun from a Cold War
Posted: 12 May 2017
Date Written: May 12, 2017
Recently, the Research and Experimentation Tax Credit was made permanent. Enacted in 1981 with a different title, the Research and Development credit was a created as a temporary tax expenditure program meant to embolden innovation research in the U.S.
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.
Yet, since its inception in 1981, the credit has been repeatedly scheduled to expire. During its lifetime it only lapsed for a single one-year period. The reason behind placing an expiration date on the tax credit has been primarily budgetary.
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 makes it difficult to 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.
Large, established companies constantly lobby for its extension and they recently won the jackpot with its transformation to a permanent tax preference. Is the credit an effective innovation spending program or a rent seeking device and political giveaway from the Cold War era? This Article hopes to answer these questions.
Keywords: Research and Development, Experimentation, Tax Credit, History, Innovation, Cold War
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