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Permanent Tax Credit Needed to Boost Research and Development

Permanent Tax Credit Needed to Boost Research and Development

Wallsten Testifies before Senate Finance Committee

Contact: Amy Smorodin
(202) 828-4405

September 20, 2011 – Government funding for research and development should focus on activities that would not happen otherwise to avoid crowding out private sources of funding, stated Scott Wallsten in testimony today before the U.S. Senate Committee on Finance. During the hearing, “Tax Reform Options: Incentives for Innovation,” Wallsten suggested that a permanent tax credit for qualified R&D would help stimulate additional innovation in the private sector.

In his testimony, Wallsten, Technology Policy Institute Vice President for Research and Senior Fellow, identified a gap in the optimal and actual level of research and development activity in the economy. He explained that since private research and development exhibits positive externalities, and investment is based on expected private returns and not expected social returns, firms are likely to invest less than is optimal for society. In addition, “due to its riskiness and the inability of the researcher to provide full information to financers, the cost of capital for research is higher than for many other goods,” Wallsten explained. Both these factors illustrate that government can play an important role in supporting research and development.

Wallsten advised that the R&D tax credit appears to be a successful policy tool that stimulates additional R&D but he made two suggestions to increase its effectiveness. “A permanent R&D tax credit would be more consistent with the way companies make decisions regard R&D spending and is more likely to have the intended positive effect on private spending,” he stated. In addition, updating and simplifying the process for determining eligible expenditures would help to avoid inadvertently subsidizing R&D spending that would have occurred anyways.

Wallsten stressed that while the tax credit helps stimulate R&D broadly, without picking winners and losers, direct government funding is important for basic research, which is not necessarily profitable for the private sector. Unlike subsidies for R&D close to yielding commercializable products, subsidies for basic research are less likely to fund projects that the private sector would undertake anyway.

Wallsten’s full written testimony is available on the TPI website.

The Technology Policy Institute

The Technology Policy Institute is a non-profit research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at https://techpolicyinstitute.org/.

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