The Benefits of a Permanent R&D Tax Credit on the U.S. Economy

From mice that can handle their whisky and the cloning of cats to temporary tattoo’s that monitor your health and invisible fish aiding military camouflage – certainly, research and development (R&D) has seemingly made the impossible possible. Most notably, there is one policy that has allowed for the expedition of innovation in the United States, and that is the R&D tax credit.

creativity-819371_640As we mentioned yesterday, congressional negotiators released a bill this week that described plans to extend various tax breaks. The House and Senate are expected to vote by this week’s end. If passed, the bill would make 20 tax breaks permanent, including the R&D tax credit. The provision would save businesses $113 billion over the next decade, constructing it as the single largest tax break in the proposed package.

Although the nation awaits the announcement from the House and Senate, there has been no shortage of public interest groups supporting the permanency of the credit. Since its formation in the 1980’s, the R&D tax credit has become one of the most widely used apparatuses for motivating innovation in the United States. However it has never become permanent law, but rather, has been renewed and extended 16 times.

Nonetheless, previous research has shown that a permanent R&D Tax credit would lead to high wages for workers and gains in productivity. The National Association of Manufactures (NAM) released a report earlier this year that analyses the economic impact of the R&D tax credit, worth approximately $7 billion annually in recent years. The report, titled A Missed Opportunity: The Economic Cost of Delaying Pro-Growth Tax Reform, strengthens the debate for making the R&D permanent in the United States. The report believes that a permanent tax credit would promote investments that fund productivity gains and result in greater earnings for workers.  The report reviews scholarly literature to conclude that making the credit permanent could add almost 1 percentage point (about 0.9) to GDP growth on an annual basis. The authors highlight that R&D activity is indispensable to a competitive manufacturing sector and plays an imperative role in an economy.

Moreover, a permanent R&D tax credit would provide a reliable funding source, which as a result, could encourage investment in basic research. Undeniably, research is known to aid in the new development of more cost-effective and efficient technology products and processes. In addition, a permanent R&D tax credit would ensure businesses that they can engage in innovative activities, without fear of getting audited.

Hence, having a permanent credit could boost productivity, innovation, wages, and the GDP growth, leading to US companies being able to more effectively compete in a global marketplace. Indeed, only time will tell if the bills will be passed by House and Senate, however, Swanson Reed welcomes legislation to extend critical tax incentives that are vital to our clients. Furthermore, as the above shows, research and development is essential for our nation’s long-term competitive economic growth. Swanson Reed is a specialist R&D tax firm –  contact us today if you need help submitting your claim, are engaging in R&D activities, or with any questions you may have.

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