Partisan divides threaten to undermine legislation that otherwise should have bipartisan support. With the end of the year fast approaching, several proposals have been made to correct the anti-innovation policies signed into law in 2017. Without the passage of corrective actions such as the American Innovation and R&D Competitiveness Act, America’s transformation may face serious setbacks, especially for small business, tech and manufacturing.
After the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, the research and development (R&D) tax deductions were changed to offset the budgetary implications of the bill. The change prevents businesses from fully deducting their R&D expenses in the tax year they occur but mandates that they amortize them over five years. By 2022, businesses will lose 80 percent of their annual turnover for R&D. This is coupled with legislation like the Infrastructure Investment and Jobs Act (IIJA) that increases investment, such as $43 billion for broadband, rather than removing it.
The effects are devastating for small businesses in technology and manufacturing, which are the main drivers of innovation for US businesses in this space that require R&D to remain competitive, as the new and unique technology products are the best way to enter the market. Small companies, which are usually startups without a reliable source of income, rely on full deductions to stay in business. If a company has R&D expenses of $50,000, their deduction under the old system (assuming a 21 percent statutory corporate income tax rate) is $10,500. Now it’s only $2,100.
America’s ability to innovate gives us a competitive advantage over other countries that improves the lives of all through increased economic output due to lower labor inputs. America does not have the most people, nor the most land, but it boasts one of the most pro-innovation economies in the world. This innovation is the basis of America’s global dominance, and it is the favorable policies that promote and maintain this competitive advantage.
Without these deductions, many technology start-ups may not be viable, and even large enterprises that can afford higher costs may withdraw from R&D because it no longer shows advantages. of the tax that used to be. Simply put, creative endeavors require companies to take greater risks. The problem is any research endeavor is risky because no one knows if the discoveries will be profitable. For this reason, the preservation of R&D tax deductions is well worth the cost, because it balances the inherent risk and promotes the discovery that drives economic growth.
Stopping these deductions is tantamount to taxing innovation. This is especially true considering startups don’t always know if they have five years to fully realize their R&D decline. It is unlikely that any politician concerned about China, economic strength, or consumer welfare would want to associate with tax reform, which is the key to allaying all of these concerns. The IIJA has seen bipartisan support because it addresses many of these obvious and collectively identifiable issues, especially broadband. The correction of R&D tax deductions is equally clear.
Whether lawmakers can put aside their political differences to preserve funding for American innovation before the end of the year is still up in the air. Reports from Capitol Hill indicate there is a bipartisan path to do so if compromise is possible in other areas. Waiting until 2024 does not necessarily endanger the businesses that are the engine of economic growth.
Isaac Schick and Steve Pociask are with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.
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