Tag Archives: R and D

Kyl’s "agenda" disappoints on the R & D tax credit

In today’s Wall Street Journal, Jon Kyl calls for a “uniform and generous treatment of research and development expenses” as part of a “growth agenda for America.”

…we should consider a uniform and generous treatment of research and development expenses that does not favor any particular innovation but will encourage businesses of all kinds to create and grow in ways that could never be achieved if government officials try to pick winners and losers.

This position is in line with Kyl’s view that “our tax system should not be a tool for social engineering; rather it should collect the revenues needed to operate our federal government.” But what exactly does he mean by “uniform and generous” here? It seems odd language to use if you are simply trying to get government out of the business of picking winners and losers, or — more likely — out of business’s way altogether.

“Uniform” for Kyl means non-preferential, I suppose; government will not say that wind or solar energy are deserving of credit while coal mining is not. He does not say that with this autonomy — and with the tax credit — comes responsibility, to respect limits, show restraint, and make the right choices. And this is a telling omission. As for “generous,” Kyl would seem to mean hands off – not too much oversight or scrutiny, allowing businesses to determine what counts as research and what does not — which, as I noted in another post, led to some of the abuses of the original R & D tax credit.

This op-ed may simply be the Republican Whip’s attempt to set himself up as an anti-Keynesian — some public posturing before November. His position on the R & D tax credit seems to say, research is whatever business wants it to be; it will benefit the public because it will produce growth; growth is good in and of itself. This is not particularly original stuff, nor does it take the discussion anyplace new.

There’s nothing wrong with championing the R & D tax credit or trying to minimize government intrusion in business. Where Kyl fails is asking for anything in return for the kid gloves treatment. His position would be much richer and more nuanced if he did. Maybe he’s of the Joe Biden school and thinks you can’t run on nuance or stuff that’s “too hard to explain.”

In any case, we are certainly a long way here from any very interesting thinking about “research” and how it ought to benefit the public who subsidize it. And I am more convinced than ever that in this area, as in so many others, reasonable and intelligent policy — where innovation is balanced with orientation, and a growth agenda is balanced by an agenda for sustainability — will continue to elude us.

Balancing Innovation with Orientation – An Airport Postscript

Today I was at a business conference in Las Vegas where Bill Clinton and George W. Bush appeared, together, for a wide-ranging, hour-long discussion about the economy, regulation, taxes and education. At one point in the conversation, the two former presidents were asked to talk about how America can do more to encourage innovation. Clinton and W. both agreed that making the research and experimentation tax credit permanent would be a good first step.

This wasn’t terribly surprising, since both presidents had tried (but failed) to make the credit permanent; nor was it surprising that a business audience would greet their comments on this subject with polite applause. I, too, managed to put my hands together and restrained myself from jumping to my feet and exclaiming to the assembly that before we start giving tax credits for research, we need to revisit the idea of “research” embedded in the tax code.

So I did not end up having to explain to the secret service detail or my hosts that I had been agitated on this subject ever since I read Amar Bhidé’s editorial in the Wall Street Journal, and had just yesterday published a blog post on this very subject, where I wondered whether research into the human condition and the social world might not also deserve credit, provide much-needed checks and balances to the scientific and technical research the credit already covers, and yield new ideas of what constitutes true prosperity, real wealth, or sustainable growth.

Now, at the airport, waiting for a redeye back to New York, I am still in the grip of this idea, which, as I admitted in my previous post, probably sounds a little far-fetched. But there is a line of inquiry here I don’t want to lose: that research into culture and society, into language and history, into how people learn and how things change, will balance innovation with – I guess this is the word I would use – orientation: a sense of the right direction, an understanding of limits and where propriety and restraint should be shown, of where judgment needs to be exercised or informed choices need to be made.

Think, to take just a small example, of the concern within business organizations around social media. This goes far beyond the fact that many organizations don’t know what to do about Twitter or Facebook or LinkedIn; that barely scratches the itch.

The conversation has turned from the occasional remark on the role of business in society to anxious chatter about the transformational role that society, or the social, can play in business. There is a growing realization that the social matters enormously to the way people collaborate, the way organizations develop and change, the way business goes to market, and to the bottom line. If, as I might put it, every enterprise is already a social enterprise, why would organizations be reluctant to devote some small portion of their R & D dollars to original research into how peering works, or how social networks function, or how individuals surrender, or refuse to surrender, autonomy in exchange for belonging, or how trust is built or won.

Still sound far-fetched? Maybe. I realize I am talking here in very broad terms, off the top of my head, and I’m also aware that some organizations are already taking these matters seriously, even if they don’t, or can’t officially consider them R & D. Still, it’s fair to say the vast majority are not dedicating resources or sufficient resources to these topics, primarily because, unlike scientific and technical research, they don’t promise to yield new wares, and because they seem soft, mushy, hard to define and pin down.

I realize, too, that the broad trend I am describing here may be a manifestation of a much greater anxiety. It may be that we are trying to harness the constructive power of the social now only because we sense a loss, a lack of social cohesion, the demise of traditional social values and the disintegration of traditional human groups, the atomization of social life and the erosion of trust.

Be that as it may, it is undeniable that how seriously organizations deal with these issues will bear on their performance, on their ability to innovate – broadly, as Bhidé would say — and to orient themselves in an increasingly disorienting world.

Credit Where Credit is Due: The Human Side of R & D

Amar Bhidé argues in a recent op ed that making the R & D tax credit permanent will “not encourage the broad-based innovation that is crucial for widespread prosperity,” and he is skeptical of the idea – which has been around since the credit was first instituted, on a temporary basis, in 1981, and which has been one of the arguments advanced by the Clinton, Bush, and now the Obama administration for making the credit permanent — that there is significant “spillover” or “public benefit” from private investment in research. While his skepticism seems warranted, the question whether corporate investment in “research” can produce “higher returns for society” really turns on how we think about research, innovation and technology, and how we address the broader, unsettled question of the proper role of business in society.

“Research and experimentation” has been a murky area, even after reforms were made to correct abuses of the original 1981 statute, which yielded such triumphs of “research” as Chicken McNuggets or different flavors of soda pop, and creative accounting that wrote off failed ventures as “experiments.” In the 1986 reforms, Congress developed a test – a statement of what qualified as research — to clarify the law on this point. As Robert S. McIntyre noted in a 2002 piece on the credit and its abuses:

The IRS eventually interpreted this “public benefit” or “discovery” test to require that qualifying research must be directed at “obtaining knowledge that exceeds, expands, or refines the common knowledge of skilled professionals in a particular field of science or engineering.” In other words, if everybody already knows what a “research” project is intended to “discover,” then the government won’t foolishly subsidize it with a tax credit.

This excess, expansion, or refinement of “knowledge” – something that goes beyond what “skilled professionals” in “a particular field of science and engineering” already know, or can anticipate or intend – is where the law tells us to look for the public benefits of corporate R & D. True innovation lies in unexpected outcomes. And businesses should be rewarded for advancing technical knowledge, or at least given an incentive to do so, because the advancement of technical knowledge will bring economic prosperity and other benefits.

There are lots of assumptions being made here about the way things work, and it’s not at all clear that things really do – still — work this way. Much of the thinking here and business, society and technology goes back to the post-war era. There are, for instance, connections to the theories of economist Robert Solow about the role of technical progress in growth of industrialized countries. Solow observed that technological advancement is the key force in economic growth – the “residual” after all conventional inputs, including capital and labor, are accounted for. It seems reasonable to conclude from his observation that if we encourage capital-rich companies to invest more in R & D, technological advancement will propel the economy forward — while at the same time delivering new “knowledge” and new “discoveries” (and, the Obama administration hopes, new jobs).

It is no discredit to Solow to say that his thinking exemplified and helped fuel the technological optimism of the postwar period. He famously calculated that four-fifths of the growth in US output per worker could be attributed to technical advances. Now, certain technical advances have led to a decline in US productivity, or threaten US workers with obsolescence. This is just a small instance of the way in which our experience challenges our faith in technology.

Belief in the “residual” power of technology to fuel economic growth and materially benefit society has survived well beyond the industrialized national economies Solow studied for a number of reasons. Corporations do not simply – or cynically — want to encourage the belief that tax breaks they receive will somehow benefit the larger society; corporations, too, are creatures of technology and wholly captive to technological optimism. More broadly, the notion that technology can deliver economic as well as social benefits is still something Americans believe, or want to believe, despite lots of evidence to the contrary. We’ve staked our whole way of life on the idea.

Of course, Bhidé doesn’t go this far. Instead, he argues, we need a more “inclusive” view of innovation – one that takes into account “innovations in design, marketing, logistics and organization” – if we are to get beyond the narrow (and, to his mind, mistaken) view that increased R & D spending is going to correct market failures or produce beneficial outcomes.

But that broader view is not something we should expect scientists and engineers, or lawmakers and the IRS, to deliver. Nor is it a subject on which we should simply defer to professors of business or economists — who will never settle the matter anyway. Part of the trouble, in my view, is not simply with the idea of innovation. It’s with the idea of “research” as something that produces only scientific and technical knowledge, or as an activity to be undertaken solely by scientists and engineers (aided and abetted, perhaps, by economists and professors of business administration).

It seems to me that if we are going to provide incentives for research, we can try to do better than hope for spillovers or accidental benefits from the lab-work of scientists and engineers. Why not broaden the scope of the research we encourage and underwrite with tax credits to include other kinds of research that might benefit the public? What would the corporate R & D picture look like then? How might organizations capture research into the human condition or the social world, and develop its discoveries and perspectives to improve their own performance, or obtain a truer and more complete picture of the world? How would their performance measures change, along with measures of prosperity, or real wealth?

You have to wonder why these considerations don’t really have a place in the conversation, and even seem out of bounds, far-fetched. It’s worth remembering, in this context, that to “credit” something is to put stock in it, believe in it, lend it credence. Are we now so captive to the story of scientific and technical progress that we think other forms of research could never benefit the public or contribute to the common wealth?

This much is clear. Scientific research unchecked by critical judgment, historical perspective, the broad study of culture and society, or meaningful public debate, is bound to lack human scale and a vital connection to the very “public” it is supposed to benefit. And the study of the choices we make, or how we make them, or what it is like to live in this moment, at this particular time and in this particular place, is bound to yield some richer understanding of what it will take to make the right choices tomorrow.