57. Noam Noked, Integrated Tax Policy Approach to Designing Research & Development Tax Benefits, 06/2014.
Abstract: Competition between countries on research & development (R&D) investments has never been fiercer as more countries try to increase their domestic R&D and become innovation-based economies. At the same time, the effort to curtail the ability of multinational entities to avoid taxation by shifting income to low-tax jurisdictions has become a top priority in the United States, the G20 and the OECD. The tension between these trends has received little attention from policy makers and analysts. This article contributes to the literature by presenting an integrated approach to designing optimal R&D tax benefits and assessing the effect of tax reform proposals on incentives for R&D investment.
According to the approach suggested here, we should fully analyze the effect of the tax system and of proposed reforms on incentives to invest in domestic R&D, as different tax rules create different incentives. Given the effect of the tax system, we should adopt a subsidy equal to the marginal positive externality from additional investment in R&D. In designing the subsidy, we should explore what structures and features would optimize domestic spillovers from R&D, whether it would be desirable to administer the subsidy through the tax system, and how to do so.
Applying the approach suggested in this article could lead to policy recommendations substantially different from the tax reforms currently promoted in Congress and the OECD.