Investing in Innovation: The Need to Strengthen the R&D Tax Credit. Making Incremental R&D Tax Credit Permanent is Top Priority Despite Need to Reduce Federal Budget Deficit.

Given the degree of competition firms face both domestically and abroad, continued innovation and its rapid commercialization are necessary for survival of the U.S. industrial sector. The United States historically has been very successful at invention, but for too long we have been much less successful at quickly incorporating the new technology in products and processes. This factor has been an important contributor to the loss of U.S. market share in many industries. In the words of President Reagans science adviser, William Graham, Either we innovate or well be buying everything from abroad. Considering the economic stakes, it is imperative that public policy, including tax policy, encourage the formation and adoption of new technologies. The 1981 Economic Recovery Tax Act ERTA included a provision for an incremental tax credit of 25 percent for certain qualifying research and development expenditures which exceed a base level. This tax credit provision was only temporary and scheduled to expire by 1986. With the passage of the 1986 Tax Reform Act TRA, the RD tax credit was extended for an additional two years, through 1988, albeit at a lower marginal rate 20 percent, to allow time for further evaluation. Virtually all economists agree that without government incentives the private sector will not invest sufficiently in RD since it is impossible for those conducting RD to capture all of the benefits from successful RD.