WH official criticizes ‘innovation’ tax tool

A top White House official said Friday that applying a lower tax rate to business income derived from intellectual property would be “a step in the wrong direction.”

Jason Furman, chairman of President Obama’s Council of Economic Advisers, criticized proposals for the United States to apply such a lower rate through an “innovation box.” This type of tool exists in other countries, and some members of Congress on both sides of the aisle are supportive of establishing an innovation box in the U.S.

Furman said the research and development tax credit, which was extended indefinitely in December, is a better tax tool to support innovation than an innovation box.

“Moving to an innovation box would entail joining in a race to the bottom that is not justified by the economics of an innovation box and certainly not justified when an alternative, proven, effective method exists to encourage greater investment in innovation,” he said at a conference at Georgetown University Law Center in Washington.

The research tax credit subsidizes expenditures on research activities regardless of whether they lead to profits. “In contrast, an innovation box primarily creates an incentive for engaging in research that is highly profitable for the firm because the tax benefits are proportional to the income generated by the innovation,” he said.

Furman also said that the tax credit, unlike an innovation box, can improve businesses’ cash flow and is proportional to the amount of research undertaken. And an innovation box would also increase complexity in the tax code, he said.