In a recent journal article, Rashkin provided the following example of how a revised tax credit should work: “Under this proposal, research on Apple’s first iPad would have easily qualified, but any succeeding models would not unless the improvements were very innovative in nature. Since the development of breakthrough products is usually costly and risky but at the same time provides the greatest benefit to the economy, the credit rate should be increased.”
Other incentives for product innovation and manufacturing investment should include lower tax rates for companies that develop and manufacture products in the US, Rashkin told Congress. “By providing this incentive to manufacturers and their suppliers, and by removing the [IP] tax haven advantage, we would reverse the foreign outsourcing trend and reinvigorate the US manufacturing industry,” Rashkin testified.
The R&D tax credit has been renewed several times since its inception in 1981. The technology industry has longed lobbied for a permanent extension. Sen. Max Baucus (D-Mt.), chairman of the Senate Finance Committee, along with ranking committee Republican, Sen. Orrin Hatch of Utah, have jointly proposed a permanent extension of the credit. The proposal also would increase the nominal tax credit from the current 14 percent of research expenses to 20 percent.
“Making this tax credit permanent will provide certainty, and it will help spur economic growth for generations to come,” Baucus said last fall.
Observers doubt whether any tax proposal could make it through the GOP-controlled House of Representatives in a presidential election year. “A bill that does not include making the Bush tax cuts permanent or a thousand other tax provisions” has no chance of approval in the House, one observer said.
As for the Obama administration, one manufacturing advocate notes, “It's not an uphill fight to get the [White House] economists to agree that the country needs to have manufacturing.”
I agree, Jim. The manufacturing rush to Asia will look temporary historically. Asian costs are increasing, North American manufacturing costs are coming down (through advanced automation and labor give-backs). Logistics costs (and snafus) will tip manufacturing back to the region of the market.
I think the current outsourcing trend will (and is currently) reversing, not because of a modified Tax Credit, but because of multiple other Asian issues.It's been ten years since we collectively jumped on the outsource bandwagon, and look how the playing field has leveled in that time.Asia is not the low cost haven is was in 2000 and most teams I work with consider Domestic vs. Asian sourcing when placing programs. For those who have spent time and dollars on projects with 12-hour time zone differentials, experience has taught there are other factors besides labor cost that are bringing jobs back into the US.
I agree about leveling the playing field, Alex. The trick will be to create a provision that still works in 20 or 30 years. I'm sure that the current R&D tax credit looked like a great idea in 1981.
but I'll spare you the book version. I find it "interesting" that they asked someone from Apple to comment on this. They are a textbook example of what the problem is. They design products that have so much labor content that they can only be made in the far east. Even Corning Glass (a New York company) built a plant over there to make the front glass for the products. Steve Jobs once commented on how they changed the design at the proverbial last minute and had to re-work the production line. Things like this are due to management (using the term loosely) can impose arbitrary dead lines (under the short sighted eyes of wall street) to turn a profit in the short term. Design cycles have been made to FIT the ability to put 10,000 engineers on a problem. A perfect example is the Iphone antenna fiasco. I guess they fired the RF guy who predicted this problem in order to keep the design moving.
One very simple way to encourage investment rather than trading (in the stock market) would be by imposing a small transaction tax (maybe 0.25%) on every trade. This would be of no consequence whatsoever to the long term investor, yet it would make day trading unprofitable.
These are two separate issues here. Whether there is R&D tax credit or not, manufacturing will go off shore because of economic pressure. If you want to fix that, then require worker safety regulation on Chinese made goods before import to even the playing field. You can't tax credit your way out of off shoring. Does not make economic sense.
As for R&D tax credit. Why is it even needed if R&D is so great for economy. Company would naturally do it anyway. Company don't do R&D because they are looking at next quarter's profit. R&D is a black hole. Stock holder demand next quarter profit so they can sell out again. Stocks are held by the minutes to days selling in and out. There are no long term investment in stock. They are dumped soon as there is a small dip or if stock holder expect a small dip. If you have to hold on to a stock for 5 years, the mentality would be totally different. Stock holder would demand quality R&D. Not just R&D like Apple use to spend millions on for show before Steve Jobs came and got nothing out of it.
If you and your buddy start a business, and you invest 10k into it, you can't take the money in and out every other week. That will collapse the business. Stock gain use to be taxed at 30%. Now is only 15%. If you want to get to the root cause, give tax credit to investor who hold on to the stock for the long term. Let the market dictate R&D investment then.
Alex, I agree with you in that it is a sticky mess. As you know, when you poke a rigid, well engineered mechanical system, you can calculate the direction in which your push will send it. But when you poke a fluid, multiminded social system, you either get little or no response, or send it off in an unintended direction, or worst of all, you get poked back in retaliation using teeth and claws that you didn't even know the system had. Treating our economy as a momentum-conserving, Newtonian system only works when the individuals are connected rigidly, as in a well-trained military or a tyrannical dictatorship. Our economy is an information-bonded, non-Newtonian fluid. When a bureaucracy uses the term "Force" in their language, it is predetermined to fail.
I agree with you completely, Naperlou. Education and research support is where it's at. You mostly avoid the "picking winners and losers" argument. (Of course, you have to pick where you allocate your research dollars, but all research at the beginning is kind of by definition at the "loser" stage, since it's not productized nor profitable.) More importantly, educational support tilts towards STEM, which is what we should be doing -- incentivizing the nation's K-8 kids to learn science and math, so that sci/tech careers are at least possible by the time they get to college. Making those careers economically and socially attractive is a separate task which we also need to do.
Good point, Alex. On the other side, it has long been argued that tit-for-tat trade supports are tantamount to a trade war. I'm not sure I buy the argument that we should take the hit on the chin to avoid a fist fight.
On April 21, NASA launched a novel project, putting into orbit three satellites that employ an off-the-shelf commercial smartphone as the control system.
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