The Case Against Tax Subsidies in Innovation Policy
55 Pages Posted: 27 Jul 2020
Date Written: March 31, 2020
Intellectual property (IP) scholars propose replacing IP rights with tax subsidies for firms that invest in research and development (R&D). Economic models that presume full access to perfect information, and that assume the intentions of policymakers to be benevolent, serve as the meta-rationale for this policy. Based on developments in institutional economics, this article shows that information problems concerning the operationalization of tax subsidies in the IRC are insurmountable.
Innovation is the outcome of an unpredictable market process. It cannot be steered in advance of market competition. Based on public choice theory, the article also argues that tax subsidies for innovation are particularly vulnerable to rent-seeking and that tax dollars will often be captured by the politically powerful —not by disruptive newcomers. Economic realism shows that innovation is best promoted indirectly by securing the background institutions that facilitate competition and entrepreneurship. Thus, the best innovation policy is to support stable, simple, and general intellectual property rights. This is therefore the first article, amid growing scholarly consensus concerning subsidies as the new innovation tool, to present both a full-blown critique and a radical alternative. In contrast to innovation scholarship that is often animated by assumptions of perfect information and benevolent policymakers, this article shows the superiority of the property-approach under imperfect conditions.
Keywords: Research and Development Tax Credit, Intellectual Property (Ip), Tax Subsidies, Innovation Policy
JEL Classification: K00, K34
Suggested Citation: Suggested Citation