AEI

The case for ‘an innovation box’

April 28, 2015

An innovation box would encourage economic growth by imposing lower tax rates on income that accrues to patents, copyrights, unique production processes, and other innovations that result from research and investment.

Among its myriad flaws, the US tax code does a poor job of incentivizing domestic research and investment, crucial ingredients to future US economic growth. It is not clear that any of the tax reform proposals currently on the table will do much to remedy this deficiency.

There are provisions currently in the code intended to encourage domestic research and investment: for instance, the United States was the first country to implement a tax credit to incentivize research and experimentation, and it also allows corporations to immediately deduct 30 percent of any new investment. However, most economists believe that neither provision has been terribly effective at boosting investment: the on-again, off-again nature of the investment deduction means that it has done more to affect the timing of investment than the amount of it, and the research and experimentation credit is so complicated, poorly designed, and parsimonious that most corporations have little idea as to which of their activities will actually qualify for the credit. Most companies that claim the credit hire an accounting firm to identify where they can take the credit after they have already made their research and investment decisions. A substantive reform is well overdue.

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