Why the tax code should continue to allow full expenditure on research and development


When President Donald Trump enacted the Tax Cuts and Jobs Act three days before Christmas in 2017, he implemented one of the most comprehensive tax reform programs in recent years.

The new law provided for significant tax rate cuts, simplifications and other reforms in the individual tax code. In 2019, Heritage Foundation analysts assessed the Tax Cuts and Jobs Act state by state and district by district; We found that the law would save the typical American household over $ 26,000 in take-home pay and save a family of four $ 44,697.

The law also implemented corporate tax reforms. As with the provisions for individual taxpayers, these reforms included significant reductions in tax rates and adjustments to major tax deductions.

The law resulted in an increase in business investment that exceeded the forecasts of government markers, thus helping to increase earnings for workers. Two years after the tax cuts took effect, the average production and non-supervisor worker was receiving $ 1,406 more in annual earnings than they would have had if wage growth rates had continued to decrease at the previous rate.

Under current policy, companies can “expense” research and development costs, which means that they can fully deduct these costs from their taxable income in the year the costs were incurred. This deduction for “qualified research expenses” has been available since the 1950s under Article 174 of the Tax Code.

However, starting next year, businesses will be required by law to amortize these costs over five years. Unfortunately, this change in tax treatment will increase the cost of investment, thereby discouraging R&D and ultimately reducing economic growth.

At the Heritage Foundation’s Data Analysis Center, we used our new corporate tax computer model to assess the budgetary impact of full deductibility of research and development expenses. This cutting-edge computer model borrows techniques from probability and statistics to assess the income impact of various changes in corporate tax laws.

The graph below shows the impact on income over 10 years of an immediate deductibility of permanent R&D expenses.

As the graph shows, revenues would fall by $ 128 billion over 10 years if we allowed full expensing of research and development spending. The Tax Foundation also noted this proposal in 2019.

Congress should work to prevent tax hikes that are damaging to businesses and individuals, including those resulting from the research and development expense provisions that will be implemented next year.

While further reforms are warranted to reduce the harms of the tax code, Congress should pair them with cuts in government spending.

As two major reports have shown this year, compensation programs, especially Medicare and Social Security, are the two main drivers of the national deficit as well as massive spending. Appropriate reforms to these rights are the only meaningful way to deal with the country’s growing debt.

Allowing the full deduction of R&D expenditure would be a step in the right direction towards the elimination of policies that discourage investment.

Taxes stifle economic growth and job creation, and it is fundamentally important to maintain a healthy economy that allows our businesses to remain competitive in this ever-changing 21st century. Lawmakers would be well advised to make research and development expenses fully deductible.

This piece originally appeared in The Daily Signal.


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