Facing the Reality of Global Competition with an R&D Tax Credit

The Wall Street Journal last weekend published an op-ed by Tufts University professor Amar Bhidé arguing against the efficacy of the federal research and development tax credit, “Don’t Expect Much From the R&D Tax Credit.”

Bhidé’s argument falls short because he barely acknowledges the global competitive realities faced by manufacturers in the United States, including the growing race for R&D investment dollars worldwide. (It’s an odd oversight coming from a professor from Tufts, an institution with a sterling reputation for studies in diplomacy and international economics.)

Congressional failure to renew the R&D tax credit, which expired last December, would represent a unilateral surrender in this competition. Innovation and jobs would both suffer as companies adjusted their domestic R&D to reflect the U.S. abandoning the race.

A few key facts:

  • In 2009, 21 OECD countries offered R&D tax incentives — 16 of which offered stronger incentives than the United States — compared to just 12 OECD in 1996. This 75 percent increase over 15 years is anything but coincidental, but rather a targeted effort by countries to jumpstart technological advancements and innovations by the private sector.
  • The U.S. share of global R&D has fallen from 39 percent in 1999 to 33 percent in 2007, while China’s share increased fourfold. (Source: Organization for Economic Co-operation and Development, “Ministerial Report on the OECD Innovation Strategy,” May 2010)
  • China surpassed Japan’s ranking in 2009, taking the No. 2 spot behind the U.S. in world R&D spending.

Nearly 18,000 companies use the credit, far more than just the largest companies with large R&D budgets. Indeed, companies of all sizes doing R&D on American soil continue to be courted, in some cases aggressively, by other countries to move their U.S.-based R&D offshore.

The U.S tax credit is available only for research and development performed in the United States. IRS statistics further show that the R&D credit is a jobs credit – 70 percent of the claims made against the credit are for employee salaries.

Manufacturers are keenly aware of the tax credit’s incentives and impact. The manufacturing sector accounts for nearly 70 percent of R&D credit claims and performed 70 percent of all business R&D in the United States. The emphasis is understandable: R&D fuels the innovation that drive new product development and increased productivity — two necessary factors for growth in manufacturing.

The professor’s arguments make might sense in a theoretical setting, but manufacturers live in the real world where many countries are competing for companies that do research and development. From a manufacturer’s perspective, a more accurate title for Professor Bhidé’s op-ed might have been, “Don’t Expect Much if the R&D Tax Credit is NOT Renewed, Strengthened & Made Permanent.”

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