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.
Alex, there are certianly reasons to want to do something at the governmental level to counter the Chinese government's intervention in their economy. On the other hand, this is just like what the Japanese did over two decades ago. At least now, the US is still very much in the running. If the government has a role I would vote for R&D support in the form of educational support and research labs.
RadioGuy, this tax credit is not aimed at you. It is really aimed at large companies that spend billions on R&D. Your argument about the broader reform is more on target. For one thing, it would help everyone, not just the large player. On the other hand, it make this whole debate about the R&D tax credit moot. The fact is, we have become too tied to manipulation of our economy through taxes. As the issues with the current R&D tax credit mentioned in this article show, we cannot respond quickly through tax policy. We are always behind the curve when it comes to that.
As the finance guy for a small company (of the "5 guys in a garage" variety) my partners asked me to look into the R&D tax credit. I quickly found that it is completely unworkable for a small business like ours, which mostly operates on a cash accounting basis.
In order to make use of incentives like this, we have to use a much larger accounting system, where we maintain separate financials for
- day to day operations
- federal tax accounting
- state tax accounting
Instead of expensing our lab costs and the labor costs of the engineers doing the development work, we have to capitalize them and manage different depreciation schedules for the federal and state acoounting systems.
In short, to benefit from such incentives, we have to create a high-overhead accountant infrastructure, and structure our business around it. This may well work for a larger company with venture finance backing, but it is completely counterproductive for a truly small business.
As far as I am concerned, we would be much better off broadening the tax base by eliminating many of these "special incentives" a.k.a. loopholes. If desired, we could make the reform revenue neutral by lowering the corporate income tax rate or (even better) expand the 15% bracket up to $500K.
Of course, such a simplification is not likely to happen any time soon, since it is the larger companies with the tax lawyers on staff that have the money to spend on lobbyists.
The argument for leaving the market unregulated is good until one comes up against what China does to support its industries and technology vis a via the U.S. If China is unbalancing the playing field, as it were, then doesn't the U.S. have a right (and even a responsibility) to rebalance it by offering some levels of support, whether it's tax credits or R&D support, or whatever?
I'm not a tax expert, but my understanding based on what I've read elsewhere is that companies can't claim the R&D tax credit for any research conducted after the start of commercial production.
If the goal is simply to promote development of new technologies, then this makes sense. But, as George points out, there is no guarantee that companies won't use this credit to develop products in the U.S., write off the development costs, and then manufacture the products overseas. Then the U.S. gets both less tax revenue and fewer jobs. It's win-win for companies who do this, and lose-lose for the U.S.
But if the goal is to promote manufacturing, it might be a good idea to allow companies to claim the credit for research directed towards improving existing manufacturing processes -- provided, of course, that these manufacturing processes are located in the U.S.
Michael Rashkin's article in EETimes makes a number of other interesting points, such as how the credit disproportionately benefits large companies, who don't need it in the first place. On the other hand, small start-up companies can't benefit from tax credits if they haven't made any profits, because they don't have any tax liability to begin with.
It seems to me like it might make sense to put a cap on the size of company which is eligible for the credit, like some income-based education credits. Maybe, for very small companies, the credit could even be made refundable, like the Earned Income Tax Credit.
making the credit applicable only to "innovative research and breakthrough products,"
Who determines if a product meets those conditions and then how soon before the companies start gaming the system so ALL products are innovative and breakthroughs.
The beancounters and lawyers will not rest, not with the money involved and the desire to wring the highest profits possible, irregardless of the societal and technological aspirations of the R&D credit.
Good points, TJ. Yet at some point the differential between China labor costs will even out somewhat. China is already seeing increased labor costs, particularly in plants that make goods aimed for the U.S. and Europe. That trend is sending a lot of manufacturing to Viet Nam.
Here in this country, manufacturers have negotiated labor costs down. Add shipping to the cost of China manufacturing and the gap begins to close somewhat. Add a few tax incentives and the U.S. may become an attractive place for manufacturing again.
Thanks for posting the link. After reading it, I think we should let the tax credit die. In practice, while the idea of the R&D tax credit is definitely appealing, the RESULTS over 30 years have been less than impressive. It's just another example of government spending going to companies that don't need it, and spending not producing specific results.
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