Tax Incentives for Innovation: Time to Restructure the R&E Tax Credit

Published

January 12, 2007

Author(s)

Gregory C. Tassey

Abstract

The R&E tax credit was originally designed incorrectly, and subsequent attempts to restructure it have not addressed the major deficiencies. Moreover, in the 25 years since the R&E tax credit was enacted, a steadily increasing number of countries have implemented or expanded competing tax incentives, which in many cases are better structured and larger in size. As a result, the relative impact of the U.S. credit is now negative in terms of incentives to conduct R&D within the domestic economy. The inadequacy of the credit stems from both its small size and its incremental format. More specifically, the impact of an R&D tax incentive is affected by its scope of coverage, the ability of industry to take advantage of it over the entire R&D cycle, the magnitude of the incentive relative to other nations tax policies, and its ease of implementation. In the end, a tax incentive must lower the user s cost of R&D sufficiently to overcome barriers to allocation of private-sector resources commensurate with the potential rates of return on such investments. As a policy instrument, a tax incentive for R&D should be most effective if its form is a flat rate on all R&D.

Citation

Journal Of Technology Transfer

Pub Type

Journals

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Keywords

E&D investment, innovation, innovation policy, R&D policy, R&E tax credit, tax policy

Citation

Tassey, G. (2007), Tax Incentives for Innovation: Time to Restructure the R&E Tax Credit, Journal Of Technology Transfer, [online], https://tsapps.nist.gov/publication/get_pdf.cfm?pub_id=900038 (Accessed October 11, 2025)