`Tax reform' could curb innovation
WHILE the United States Senate forges ahead to close tax loopholes for the wealthy, a tax disaster lurks in the background, waiting to spring on companies that depend on research for their future. That disaster is the proposal to base a minimum corporate tax in part on the amount of research and development that companies undertake. The proposal is not, as you might suppose, to reduce taxes for companies investing heavily in their futures. On the contrary, the Senate is considering adding R&D expenses into a base on which a minimum tax would be levied.Skip to next paragraph
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The objective of the minimum tax is to force all profitable companies to share in the tax burden. At present, elaborate loopholes allow at least 10 of America's largest corporations to pay little or no taxes on immense profits. US electronics companies are not among the culprits. On the contrary, the industry pays very high effective tax rates -- about double the national average. But the proposed method to force non-taxpaying companies to pay taxes -- taxing them on research and development spending -- would in fact strike hard at high-tech companies that are using innovation to build America's future while still picking up more than their fair share of the nation's tax burden.
The Congressional Budget Office estimates that electronics companies as a whole already pay effective tax rates of more than 30 percent, substantially more than would be required under a proposed 25 percent minimum tax. And this is under the present law, which allows companies to deduct R&D expenditures in the year in which they are incurred.
But legislation now before the Senate would treat R&D spending as taxable capital assets that must be ``amortized'' (spread out) over a five-year period. In effect, a company would be able to deduct only 20 percent of its current-year R&D spending when computing income that's taxible for a minimum tax.
Including R&D as (in tax terminology) a ``preference'' item on which taxing would be based would in fact be a brand new tax upon US high-tech. The bill would amount to a $17 billion increase for American industry over the next five years -- a powerful disincentive for R&D at a time when rising competition from abroad demands that the US invest in more, not less, R&D.
Arguments against basing a minimum tax in part on R&D expenses abound:
Profitmaking companies do not at present escape taxation by investing in research and development. The Securities and Exchange Commission requires companies to ``expense,'' or fully deduct, R&D costs before reporting income to shareholders. Profits are measured after deducting R&D expenditures fully when they are incurred. This SEC requirement prevents companies from inflating financial income for accounting purposes while reducing it for tax purposes.
Nonprofitable firms would be penalized for investing in R&D, because the new requirement could bring them under a minimum tax. The effect on these nonprofitable firms could be devastating.