Tax incentives drive private investment in R&D.
Hart 19[David M. Hart is a senior fellow with ITIF’s Center for Clean Energy Innovation, a professor of public policy at George Mason University’s Schar School of Policy and Government, and a lifetime fellow of the American Association for the Advancement of Science; “Less Certain Than Death: Using Tax Incentives to Drive Clean Energy Innovation”; December 02, 2019; https://itif.org/publications/2019/12/02/less-certain-death-using-tax-incentives-drive-clean-energy-innovation/]//araghvn
Taxation is one of the most powerful tools in the policy tool kit. As the old saying goes, along with death, it is one of only two certainties in the human experience. Yet, like all such admonitions, this one is not always true. Indeed, the power to exempt an activity from taxation is almost as potent a tool as taxation itself.
U.S. lawmakers have long recognized and utilized this tool. Many policies that are implemented directly by governments in other countries are carried out through tax incentives in the United States. The federal tax code contains a large array of provisions that support particular activities, industries, professions, and other groups of taxpayers.
Although some of these incentives make little economic sense, this tool can be a powerful and efficient one to drive innovation and growth. For instance, tax incentives can and should be used to stimulate firms to support research that benefits their competitors or the public, as well as themselves. Such incentives compensate firms for the risk that the research they fund may “spill over” in this fashion. Virtually all leading countries performing research and development (R&D) provide tax incentives for private research spending. The United States was the first to enact such a policy, but its generosity now lags well behind its competitors.12
Similarly, tax incentives for capital goods may lead to private investments that spill over to the rest of society. Firms purchasing new capital equipment receive only about half of the returns these investments provide. Customers, workers, other industries, and even competitors share in the gains.13