Here's One Tax Break We Can All Support
Enrico Moretti, The Atlantic:
In essence, private investment in innovation has a private return for the firm that makes that investment, but it also supplies a social return that benefits other firms. This means that the market provides less investment in innovation than is socially desirable, because the return on such investments cannot be fully captured by those who pay for it. To correct for this market failure, and compensate those who invest in R&D for the external benefits that they generate, the United States government subsidizes R&D through tax breaks.
The problem is that the difference between private and social return on innovation is much larger than the current subsidies. Bloom and Van Reenen estimate that the social rate of return on R&D is about 38 percent, almost twice as large as the private return. The implication is jarring. The United States is not just underinvesting in R&D; our current level of R&D investment is barely a fraction of the socially optimal level.
Because innovation benefits other companies in a market, the market will never fully compensate innovative companies. R&D subsidies are important in redressing the balance in favour of companies who take risks and innovate.
The UK Government recently announced that from April 2013 it would be introducing a tax credit for research and development at large firms, set at a minimum of 9.1%.
While this sounds impressive, this pales in comparison to the 14% that has been in place until recently in the United States, and is even further short of the 17% mooted by President Obama.
If the government really wants to reinvigorate this economy, it needs to get behind companies that are investing in R&D, and help them capture the returns.