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Thursday, September 22, 2011

Incentives for Innovation - Senate Finance Committee Hearing

I was honored to have the opportunity to testify before the Senate Finance Committee this week (9/20) at a hearing on Tax Reform: Incentives for Innovation. A few comments I included in my oral and written testimony:

1. Tax reform should consider our country's economic, societal and environmental goals and be sure that that tax law is not hindering them, and perhaps even support them. Innovation is something that for economic reasons also warrants some support through the tax law.

2. Considerations should be given to modifying rules that potentially hinder innovation. For example, some MACRS lives, such as for computers, are too long. Also, while there is a desire to build cars with a higher mpg, Section 280F depreciation limits on cars makes them less attractive to business buyers. Why not remove or greatly reduce such limits for cars getting a certain mpg?

3. Modernize the Section 179 expensing election by also having it apply to intangible assets.

4. Look for ways to provide wider incentives for start-up innovators such as by broadening the Section 1202 gain exclusion to investments in partnerships and S corporations too.

5. Improve the research tax credit by making it permanent. Also review the exclusion for internal-use software as that term has a different meaning today than it did in 1981 when there were no web-based businesses.

6. In reform discussions about lowering the corporate tax rate, we'll need to consider the global economic reality that not only do other OECD countries have a lower statutory rate, many also have tax incentives for R&D.

For more information:
  • Hearing website with links to written testimony of Senators Baucus and Hatch and the four witnesses.
  • My website with links to other tax reform hearings held in 2011.
What do you think? Should there be incentives for innovation in the tax law or should they all be removed for simplification and rate reduction purposes? If any should be included, what should they be? Any other suggestions?


Anonymous said...

Talk about adding complication to a tax system that is already over-complicated! Were you really thinking at all about trying to simplify the tax code? If not, shame on you.

Professor Nellen said...

Thanks to anonymous for the comment about whether I had forgotten about simplicity. I have not. I mentioned some simplification ideas in my testimony including broadening the Section 179 expensing election and having only one formula for the research credit. But, why not say get rid of all of the special rules - Section 179, the research tax credit, etc. Generally, a tax with a broad base and low rate best meets principles of good tax policy including simplicity.

Well, I think that for economic development and international competitiveness purposes, as well as economics, the U.S. tax law needs to have some incentive/subsidy for research conducted in the U.S. That said, we can do that in a simple way. Companies engaged in R&D already keep records of it for financial reporting purposes. Additional records for tax would include verification that it was "qualified research" which should not be a problem for most companies.

Other ideas or comments?