Abstract

"The History of R&D Loopholes, Or Why You Pay More Taxes than Amazon"

Sarvnaz Lotfi, Carnegie Mellon University (sarvnazlotfi@gmail.com)

In the decades following the inauguration of the nation’s modern income tax laws in 1913, a distinction evolved within the United States between investments of capital, on the one hand, and ordinary and necessary business expenses, on the other. Just where research and development (R&D) spending fell along the capital-expense boundary remained a point of contention on through the 1970s, when a crumbling economy led desperate policymakers to grasp after the possibility of an exploitable, law-like relationship between R&D “investment” and economic growth. Hearing from macroeconomists within government and academia, legislators adopted their two-fold, a priori belief that R&D operates like capital investment and that to incentivize private-sector R&D spending is to accelerate economic growth. By 1981, the Reagan Administration successfully translated the economists' faith into the nation’s first tax credit designed to boost private-sector R&D spending. Following 2015, when the Obama Administration gave R&D incentives a permanent place in the US Tax Code, multibillion dollar tech firms like Amazon and Netflix have used these loopholes at various times to pay zero federal income taxes. This paper will draw from archives of the Nixon Presidential Library to place in political economic context a series of R&D policy experiments that were abandoned almost as quickly as they were proposed in the early 1970s. Precedents for these policy experiments and how (if at all) they prefigured Reagan’s innovations in corporate income taxation are questions guiding this working paper.