Since after the Great Recession Congress has put in place temporary bonus depreciation for new capital investment. Given the current state of the economy, already high levels of corporate taxation, and the need for additional investment, Congress should renew bonus depreciation for at least another year.
As ITIF recently wrote, American companies already face the highest statutory tax rates in the developed world. Their effective tax rates also tend to be high, partially because they are taxed on their worldwide income. Bonus depreciation, which temporarily allows companies to deduct equipment purchases faster than they otherwise could, partially offsets this. But the current provision expired at the end of last year.
Faster depreciation reduces the economic cost of new equipment, thereby spurring more investment. It does not reduce the total taxes paid by a company, but it does delay them. The benefit to companies exceeds the cost to the government because the latter can borrow at much lower rates. Higher investment also benefits the broader economy by increasing productivity and creating jobs.
Bonus depreciation also helps align tax liability with actual profits. Accounting methods require companies to write off equipment … Read the rest
As countries compete for corporate R&D locations–and the attendant jobs and technology spillovers–tax policy is an important tool governments need to be aware of. There are several types of tax policies that attempt to attract R&D: tax credits for R&D spending, special tax allowances for R&D spending, and tax rate reductions on R&D output (usually based on patents). While it is well established that R&D spending and tax allowances tend to increase the quantity of R&D spending, a new paper by UK researchers Ernst, Richter, and Riedel finds that reductions in patent income taxes increase the quality of corporate research. Higher-quality research means effective R&D that has better benefits for the entire economy.
These research results are good news for the UK, which recently enacted “Patent Box” legislation, giving companies a 50% discount on profits they earn from patents (down to 10% from their planned 2015 overall corporate rate of 20%). Other countries that offer similar tax breaks for patent income include Luxembourg, the Netherlands, and Belgium.… Read the rest
Noted conservative economist and former Romney advisor Greg Mankiw has just written an article with the unabashedly conservative title “In Defense of the One Percent”. The pile-on has already begun, with an excellent takedown at the Economist American Politics blog, and good pieces as well at the left-leaning CEPR and Unlearning Economics.
Mankiw defends the rich because he believes they have brought us value commensurate with their wealth. This is the essence of conservative neoclassical economics: markets allocate value the way that value should be allocated. There are theoretical exceptions to this rule, of course, like rent seeking or other market failures, but real conservatives remain “unconvinced” that such exceptions are to be found in the real world.
Mankiw prefers the idea that markets can still work as intended (optimally allocating resources) without being entirely “fair”: insufficient high-skill workers and “superstar” gains can drive inequality even in perfect labor markets. Mankiw is sympathetic to these arguments because they allow him to claim that everything is working as intended: there’s nothing to see here, the markets are working, please move along.
But wait a minute.
What Mankiw would have … Read the rest
Yesterday the Senate Homeland Security Committee’s Permanent Subcommittee on Investigations held a hearing on “offshore profits shifting,” with a focus on making Apple and its CEO Tim Cook into the poster child of corporate tax avoidance. As I wrote in The Hill, blame is not a national competitiveness strategy.
But another theme of the event was the seeming unfairness of a situation where domestic multinationals like Apple are not required to pay the full 35 percent tax on their foreign earnings. Despite the fact that we are one of the only nations with a worldwide system of taxation (that requires U.S. multinationals to pay US taxes on foreign earnings when they bring them home), this notion is actually wrong. It is actually in the interest of non-multinational U.S. firms for multinationals to pay less in taxes. Here’s why.
U.S. economic politics is often framed as a clash between “Main Street” and big multinational corporations, with the former salt-of-the earth hard working mom and pop owners and the latter controlled by profit-hungry greedy tycoons. But this framing misses the point that what will determine whether America thrives in the global … Read the rest
“With pencils being sharpened on a debt deal,” Politico reports (subscription article), “all eyes are on the gas tax as a possible savior for transportation spending. But another option that may cause lawmakers less heartburn is being obscured by the gas tax dust: linking energy production with infrastructure spending…includ[ing] instituting a fee on oil production, or expanding oil and natural gas drilling availability.” Without a doubt, leveraging expanded energy production for revenue is a welcome idea. But linking this revenue to transportation infrastructure spending is misguided because it breaks a very useful policy connection: consumption and infrastructure use.
The thinking goes that new fees on oil and natural gas extraction are more politically feasible than a gas tax, as the cost to consumers would be relatively hidden. While industry would ultimately try to pass costs on to consumers, as the Politico article put it, “the pain of a new fee “upstream” has the advantage of not being immediately obvious to an electorate jittery about the economy — certainly nothing as in your face as a tax increase at the pump.” The problem is that tying energy production to transportation infrastructure-spending … Read the rest
As we approach the end of 2012, the currently expired U.S. R&D tax credits are being altogether ignored by the media, and generally ignored by policy makers. Nothing has been done this year to ensure that firms will receive the same benefits as in the past. This leaves firms guessing as to whether or not they should increase or decrease their investments in R&D, or move them abroad. The evidence on the effectiveness of R&D tax incentives continue to mount. In the latest edition of New Economics Papers in Technology and Industrial Dynamics, another compelling analysis by Bond & Guceri, “Trends in UK BERD after the Introduction of R&D Tax Credits,” shows that R&D tax incentives not only bolster business investment in R&D, but businesses respond even more than previously predicted by Bloom et al. The analysis shows that especially in high-tech manufacturing, the R&D tax credit causes a substantial increase in R&D, which provides further evidence that a permanent R&D tax credit is needed here in the United States.
The study shows that when R&D costs are treated more favorably by the tax code than capital investment, … Read the rest
Last week, representatives of an array of think tanks and advocacy organizations from across the political spectrum gathered at the American Enterprise Institute (AEI) to discuss the feasibility of enacting a national carbon tax. It was the fifth such closed door-meeting. It might surprise people to learn that there is common ground between some conservatives and liberals on the idea of a carbon tax. However, even if a narrow patch of common ground yields a solid policy consensus, innovation must be part of the carbon tax debate.
To be sure, some activists on the Right have been highly critical of the group’s efforts, the participation of free market-oriented groups like AEI and the R Street Institute notwithstanding. In a post to a conservative listserv – in which he also leaks a copy of the meeting agenda – the Competitive Enterprise Institute’s Myron Ebell declares, “We must kill this incredibly harmful idea as quickly as possible.” “A carbon tax is not a conservative, free-market policy,” Nicolas Loris writes at the Heritage Foundation’s blog. And yet a carbon tax has a surprising number of conservative supporters and could boost national energy … Read the rest
Useful comment by Suzy Khimm about the source of innovation and Perry Rotella about how innovation happens in companies. Solitary genius is only part of the innovation ecosystem. That has always been true. It’s especially true now.
As anyone who has been to the lab at Menlo Park can attest, Thomas Edison’s intensity was imparted on a team, who often slept on cots in the lab along with their boss, when working toward what seemed like a breakthrough. In today’s world, how we do things is as much innovation as the products themselves. The U.S. tax code needs to better reflect that.
When Congress takes up corporate tax reform, lawmakers should consider a few ideas from ITIF. First, make clear that process R&D qualifies for the R&D tax credit. Currently, the way Treasury interprets the law can make it difficult for companies to take the credit for process innovation. In addition, it is easy for process innovation to spill into the market. If we make it easier and more economically worthwhile to try new ways of producing, the more firms will invest in ways to improve productivity, and the more competitive they will be. It might also make the U.S. a more attractive place to expand manufacturing operations.
Second, Congress should use the tax code to promote more collaboration between companies as well as non-corporate entities. … Read the rest
As of April 1, when a change in Japan’s tax law goes into effect, the United States will have the highest statutory corporate tax rate of any industrialized nation. It is bitterly appropriate that this happens to be the day we mock foolishness. There is a race underway for global competitive innovation advantage. More and more nations are beginning to understand their tax codes are among the most valuable tools they have to win that race. They understand that higher corporate taxes reduce investments, new business start-ups, and inward foreign direct investment. In the last 30 years, corporate tax rates for OECD nations and China have declined from nearly 50 percent to levels less than half that. Even formerly high-tax countries such as Sweden have reduced their corporate taxes dramatically. Unfortunately, the United States is not following suit. The good news is that the Obama Administration and many in Congress seem increasingly aware of this new global reality and have begun to look into meaningful corporate tax reform. The bad news is that almost all proposals for corporate tax reform are premised on revenue neutrality. The problem with revenue neutrality is that it is likely to neutralize potential benefits of reform. Simply lowering the statutory corporate rate, but then cutting deductions and credits to pay for it, will do nothing to address the fact that the U.S. also has a very high effective corporate tax rate relative to our competitors. Moreover, cutting key incentives like the domestic production credit, the R&D credit, and accelerated depreciation would reduce the incentive for companies to make the investments needed to restore U.S. competitiveness.
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The President mentioned many issues ITIF focuses on in his State of the Union address last night. And by in large, we agree with what he said when it comes to economic competitiveness. The President deserves praise for putting these issues, specifically manufacturing, front and center. He helped rally the nation and the Congress to the fact that restoration of competitiveness and a vibrant manufacturing sector are, indeed, the pillars on which rests our economic future. However, in some cases, we wish he had gone just a little further, maybe clarifying, maybe being a little bolder. Here are a few examples: Funding R&D: “Innovation is what America has always been about,” he said. Absolutely. We laud him for prodding Congress to maintain basic research funding budgets. However, the President should have included applied research in his prod. To understand why, look at Germany. Its manufacturing sector accounts for 20% of the country’s GDP as opposed to the United States 11% and German manufacturing workers earn 40% more in hourly wage compensation than U.S. manufacturing workers. Its exports of research-intensive high-tech products are seven times greater than the United States’ as a share of GDP. One reason is that the country spends six times as much on industrial research and production technologies as does the United States.
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