Last month the International Money Fund reduced its estimates of American growth in 2012 and 2013, predicting that the US economy will only expand 2 percent in 2012 and 2.3% in 2013. The IMF expressed concerns about the lapse of the Bush tax cuts and other factors leading to the proverbial fiscal cliff that looms in early 2013.
While politicians on both sides of the aisle shout and stomp their feet about the best way to address America’s economic woes: raising or lowering taxes, cutting subsidies or crafting a stimulus package, there is one policy that has demonstrated clear and significant benefit to the economy, research and development tax credits. According to a 2010 fact sheet published by the White House, "... every dollar of tax benefit stimulates as much as an additional dollar of private R&D spending in the short run and two dollars in the long run. Every $1 of R & D adds about $2 of benefit to our economy and society as a whole."
Considering that in 2005, 17,700 corporations claimed $6.6 billion in research and development tax credits, their potential impact is staggering. While the previous research tax credit lapsed on January 1st, 2012, the Senate Finance Committee included it in a spending package which it approved on August 2nd. The package is expected to reach the Senate floor for a vote next month.
Despite their benefit, many organizations had trouble claiming these tax credits, due to the difficulty in documenting work and expenditures that qualify as research and development. Our own software solutions facilitate research and development tax credit tracking, as well as general project cost tracking, through integrating projects, time and expense reporting, and purchasing. By utilizing account codes, organizations can easily identify and track labor and expenditures eligible for these tax credits.
While it is likely that the research tax credit will be reinstated, as it has thirteen times previously, the fact is the United States lags behind other countries in this regard. In some cases, far, far behind:
"“Fifteen years ago, the U.S. led the way with the most generous tax credit of any nation. Now, France tops that list with a 42.5 cent effective tax credit for every dollar of R&D spending. The U.S. allows a pitiful tax credit of six cents.”
Pamela Villarreal, Senior Fellow, National Center for Policy Analysis
U.S. Is Strangling R&D Growth: Lags Behind China and India
The creation of new inventions, the improvement of existing products and processes, as well as the generation of fresh ideas can lead to terrific economic growth. Serious consideration should be given to not only increasing the research tax credit rate in the United States, but making it permanent as well. Last year, a report by Ernst and Young determined that the R&D Tax credit would have a sizable effect on US wages and employment if it were strengthened and made permanent:
Research-orientated employment in the US would be 130,000 higher in the short-term and 300,000 higher in the long-term because of the combination of the existing credit and the strengthening of the alternative simplified credit.