Proposal Could Stop Foreign Poaching Of Key U.S. Firms

Andrew F. Quinlan President, Center for Freedom and Prosperity
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It may have garnered attention mostly from tax wonks, but new bipartisan legislation from two key  lawmakers could be pivotal to helping stop foreign firms from poaching top domestic intellectual property.

Called the “innovation box,” the new proposal, introduced last week by Reps. Charles Boustany (R-LA) and Richard Neal (D-MA), creates a tax incentive for profits from intellectual property.

The bill is crucial because European countries have adopted their own versions of the tax structure, using it to siphon off key U.S. firms, often through acquisition. It also follows the inclusion of the policy in a tax framework from Sens. Rob Portman (R-OH) and Chuck Schumer (D-NY), underscoring that the idea is gaining major traction on Capitol Hill.

Putting a workable version of the concept forward is also likely to satisfy concerns from those who concede international poaching is a significant problem but worry about implementation of the credit.

Importantly, Boustany and Neal crafted their bill to capture a variety of types of intellectual property, rather than just patents. In the real world, technological progress happens under a variety of legal structures, and the point of the innovation box is to create an incentive to invent dynamic new ideas, processes, and things that improve all our lives.

Unlike many tax credits, that are targeted at a specific industry deemed valuable by politicians, the innovation box does not “pick winners and losers,” and is thus immune from ever becoming an out-of-date fixture propped up by special interests. There is no horizon on the value of innovation.

The Boustany-Neal innovation box formula is simple but powerful: take the receipts from the intellectual property, deduct costs to determine profit, multiply the profit by the ratio of research and development (to ascertain true profit after research and development deductions), and tax this profit at 10 percent rather than the normal 35 percent corporate rate.

The key insight of the new innovation box regime, including the numerous countries that have developed similar systems internationally, is that intellectual property, unlike the tangible things that make up a traditional business – factories, employees, and the like – can be “moved” almost effortlessly from one legal jurisdiction to the next.

From the perspective of tax reform broadly, this tax competition is desirable because it keeps nations on their toes to develop tax regimes that don’t punish dynamic new businesses. And the ideal would be comprehensive tax reform that brings the U.S. corporate rate down to competitive levels. But in the near-term, the U.S. is facing a minor crisis of some of its most valuable companies relocating their intellectual property in other places.

That’s bad for the government in terms of revenues but also costly to the U.S. economy in terms of jobs. Competing in the modern economy requires staying ahead of the curve technologically, something the U.S. has traditionally excelled at, but we have been slipping for years.

The byzantine, outdated tax code – and its anomalously high corporate tax rate – are driving that lack of competitive edge in part. But while major tax reform is on the horizon – it will likely see more traction after President Barack Obama is out of office – the innovation box is a small but significant reform that could provide short-term and long-term dividends for the economy.

Boustany’s and Neal’s bill is a discussion draft, and the duo are seeking feedback from stakeholders on some unresolved questions like what the exact scope of intellectual property eligible for the credit should be. But these two lawmakers should be praised for a proposal that recognizes the dire need to keep the economy nimble in a business landscape that is only getting more competitive.

Andrew F. Quinlan is the cofounder and president of the Center for Freedom and Prosperity (@cfandp).