While Tax Reform Waits, Lets Take a Pro-Growth 'Baby Step'

Posted: Sep 11, 2015 3:23 PM
While Tax Reform Waits, Lets Take a Pro-Growth 'Baby Step'
It's well-established that the current tax code is putting U.S. businesses at a disadvantage on the global market, often prompting foreign buyouts or other things that are against American interests. But while broad tax reform is slated for next Congress at the soonest, there is one crucial step Congress could take to improve the situation.

Starting in the early 2000s, multiple European countries began experimenting with tax incentives designed to directly motivate companies to innovate, rather than favoring particular industries or approaches that were currently in vogue with the political class. One idea of interest evolved named the “innovation box”, often also called a “patent box” for previous, more limited versions of the idea, relies on a special tax rate for profits from intellectual property.

The benefits of the innovation box are twofold. First, this creates a measurable economic incentive for the inventions, business processes, and other creative items that make our lives better. Second, the incentive helps the country encourage maintaining the most valuable jobs and companies in the country and discourage overseas relocation.

Let's be face the obvious. Between glottalization, telecommuting and the digital marketplace, businesses are less tied to a specific geographic location than ever before. There are upsides to this, like reduced costs, but also, for governments and employees, the threat that companies will look at other pastures (countries) where the grass is greener.

For those industries who are intellectual property (IP) focused, this is even more the case. Unlike tangible factories, store fronts and other things that compose a more traditional companies, IP generating facilities can be moved almost effortlessly, relocated from one jurisdiction to the next.

Close to a dozen key countries have already set up their own version of innovation boxes, and the results are proving to be dynamite for both the countries and those companies located in the participating countries. Sadly, U.S. firms, already weighed down by a high corporate rate and byzantine tax code, are suffering in comparison.

It's unfortunately clear to most observers that broad tax reform is not realistic with the current players of President Barack Obama, Senate Majority Leader Mitch McConnell and House Speaker John Boehner. While that could easily change with the next President's Administration, in the meantime it's time for Congress to act.

No, Congress isn't about to clean up the code today. But innovation boxes are a simple, easy win for everyone that can be implemented quickly and provide some quick fuel to America's economic engine. To channel Bill Murray in the classic movie What About Bob?, some “baby steps.”

Creating an Innovation Boxes incentive is a thoroughly bipartisan proposal, championed by key players from both parties. It's also bicameral, with separate House and Senate lawmakers looking at their own version of the proposal. It is important to note the innovation boxes that have been successful in countries like Great Britain take great pains to ensure the tax is applied evenly to different industries. There are details which need to be ironed out including specifically defining what types of intellectual property are eligible for the special rates. Again, any of these must be diligently crafted to create an even playing field, not merely special carve outs for any one industry. After all, the main advantage of an innovation box incentive is that it simply helps foster all economic innovation rather than benefiting specific, politically connected industries.

We all know that the profit motive that underlies the patent system has helped foster tremendous improvements to the human condition. Innovation boxes are a logical next step that up the ante in an increasingly competitive international economy.

While tax reform remains on the horizon, a U.S. innovation box is about the easiest victory on the tax front imaginable for a Congress and president that have struggled at times to work together. Lets all take a "baby step" towards a saner tax code and reap the improved economy that will result.