Economists have long shown that investments in research and development, from both government and the private sector, are critical in driving innovation, productivity and growth. R&D investment is even more important today because many U.S. competitors are seeking to compete in innovation-based industries, including by expanding research funding and putting in place generous R&D tax incentives.
The United States used to lead in both areas. In the 1960s, the federal government invested more in research than all other governments and foreign businesses combined. No wonder the United States dominated the world in technological innovation. The United States also led in tax incentives for innovation, with President Reagan signing into law the world’s first R&D tax credit in 1981. As late as the Clinton Administration, the United States led the world in R&D tax generosity.
But decades of tight purse strings in Washington, coupled with ideological predilections of both sides of the aisle to have government use tax revenues for other purposes, especially tax cuts and entitlement spending, has meant that the federal government is now a laggard in supporting public and private R&D.
According to a recent study the United States ranked 19th in R&D tax generosity, behind nations such as China, India and Japan. When it comes to government support for R&D as a share of GDP, the United States ranks 9th among OECD nations.
It is wishful thinking to believe that this lack of support doesn’t matter when it comes to U.S. innovation-based competitiveness. To be sure, the United States possesses other strengths, such as robust venture capital markets, but to win in today’s fierce global competition, nations need to ensure that all parts of their innovation policy, including financial support, are world-class.
So how much more would the federal government have to invest, both in direct funding and tax expenditures to be once again be the world leader?
For research funding, the top four nations (South Korea, Austria, Norway and German) invest an average of 0.89% of GDP in research. The U.S. federal government invests just 0.63%. For the United States to invest 0.89% in research, Congress would have to appropriate $50 billion more annually. To exceed the top country, South Korea, it would need $64 billion more.
For R&D tax incentives (R&D credits and “patent boxes”), the top four nations (France, Portugal, Spain and Turkey) have an average subsidy rate of 37.5% (in other words, the government provides a tax credit for 37.5% of business R&D expenditures). The U.S. rate is just 12%. The cost in terms of tax expenditures for business R&D is $9.9 billion, so for the United States to provide a subsidy rate of 37.5% would require an estimated $30.1 billion additional tax subsidy. To exceed the generosity of France’s credit (the most generous), it would need $37.1 billion more.
So, for the United States to invest as much as the top four countries for R&D both directly and indirectly, it would need to invest an additional $81 billion annually. If it wanted to be the most generous on both R&D spending and tax incentives, it would need to spend $101 billion more per year.
This may seem like a lot. But this is investment, and as such it generates economic growth, which in turn generates tax revenues. The Information Technology and Innovation Foundation (ITIF) has estimated that at least 40% of R&D spending is recovered in increased tax revenues from growth and even more if the expenditures are focused on areas of R&D with big productivity impacts, like artificial intelligence and robotics. And expanding the R&D tax credit would pay for itself after 15 years in higher federal tax revenues.
President Trump has rightly called for “making America great again.” That won’t happen unless businesses and the government invest much more in R&D. Both Congress and the Trump administration have an opportunity to once again ensure that America leads in the world in R&D support.
Robert D. Atkinson is president of the Information Technology and Innovation Foundation (ITIF), the world’s top-ranked think tank for science and technology policy.