Tax Breaks and the Video Game Industry

But in this particular instance your concern is that you are using a technique that is more efficient than R&D credits and isn’t available to larger corporations that do have to pay salaries.

Don’t get me wrong, tax loopholes suck. However those tech companies aren’t paying such low taxes because of R&D credits; they’re using other loopholes for the majority of their tax evasion. R&D is exactly the sort of thing that taxes should encourage and you haven’t given a very convincing argument that this particular tax is really about sizes of companies.

If you want to subsidize specific businesses, then just subsidize them, not “everything a corporation can legally classify as R&D.” It’s not like society has a deep and abiding need to subsidize slightly better dishwasher design at GE.

“The government should subsidize startups” is so ill-phrased I don’t know where to start.

Really so you don’t think that government has vested interesting in encouraging GE to make dishwasher which are more water and energy efficient (which would qualify for R&D credits) as opposed to making models with different pastel colors (which wouldn’t).

Gee Jason you are starting to sound a libertarian capitalist.

I didn’t say the “the government should subsidize startups”. Although the Kaufman foundation has some pretty compelling arguments why we should

The concept is that R&D is targeted at making improved products which makes American companies more competitive. Better GE invest in making better dishwashers that people then purchase than they don’t and people buy them from another nation - at least that is the concept, i.e. R&D makes American companies more competitive.

And they are pretty tight on the definition of R&D after Sarbanes-Oxley rules came into play, to avoid companies claiming a lot of activities as R&D that are not. I’ve been in two major audits in two companies in which every nickle that was claimed as going to R&D activities was examined via some pretty strict rules.

I know that’s the concept, but I think it’s a stupid concept. Obligatory link to Krugman’s famous 1994 article on the concept of competitiveness. His Pop Internationalism book elaborates on this. He basically wiped the intellectual floor with everyone on this in the 1990s. Also, note that international trade theory is the area he won the Nobel for.

Effectively it’s all a shell-game on top of the concept of “if we subsidize industries, we’ll win the winner-take-all international competition to own that industry for the entire world.” Which is possible in modern trade theory for certain kinds of industries - say, airliners - but you don’t get that end result by subsidizing all “R&D” in the economy. Remember “let’s subsidize dishwasher innovation” is functionally identical to “let’s tax everyone else more so we can tax dishwasher design less”.

Your posts started making sense once I realized that you are confused about the R&D tax credit and seem to be conflating it with more specifically targeted subsidies. The R&D tax credits are quite broad and aren’t about winning specific industries. JeffL and I are talking about the same credit (I have to fill out a yearly, detailed report on my team’s R&D as well) but are in very different industries, for example.

By the way, do you think that the government should provide money for research grants? They’re not exactly the same but both are programs where the government diverts funds to incentivize R&D. Personally I think they should do both, rather aggressively. Not so that we “win an industry” but rather so that we keep coming up with good ideas that improve lives. Of course it’s hard to imagine how that wouldn’t also have a significant economic benefit for the US.

Well, what’s the point of a broad-based R&D tax credit? Making already profitable projects slightly more profitable? I don’t see how you get a positive ROI for productivity growth out of it, even ignoring the taxation transfer issues; remember the projects it will fund are the stuff at the margin of profitability. Why would those be uniquely beneficial?

Research grants are different; those have a good formal case behind them where the government can fund long-term projects that are beyond the fundable horizon for any corporation, or projects where the benefits are positive but too broad for a single corporation to capture a share, so they don’t get funded.

Incentivizing companies to work on more impactful R&D projects instead of, say, increasing profitability through marketing. Making it easier for starts up to get their ideas rolling by making their initial, R&D-heavy years easier. Etc.

Research grants are different; those have a good formal case behind them where the government can fund long-term projects that are beyond the fundable horizon for any corporation, or projects where the benefits are positive but too broad for a single corporation to capture a share, so they don’t get funded.

By making it cheaper to do R&D you’re expanding the horizon for a corporation who is considering investing in R&D as opposed to making other investments. You’re also engaging in a far too simplistic model for R&D investment. Companies engage in quite a bit of R&D with the understanding that most of it will never be profitable and the expectation that they’ll cover the cost of failed projects with the ones that do make money. The cheaper it is to engage in R&D, the more likely it is that they’ll choose to invest in a new risky project.

I’ve worked at a few big companies and none of them have worked that way. That’s not saying it doesn’t happen. Can you give some examples?

Conceptually, I am totally behind gutting R&D tax credits and having the government sponsor more basic research. It seems like it would lead to a more efficient outcome. However, that would hurt my bottom line, so let’s keep what we have today!

Google is a high profile example. They’re released dozens of projects in the past couple of years that have fizzled and died along with a few that have had significant impact.

I think it makes sense for Google, a company that spends vast sums on R&D, should have slightly subsidized tax burden because of that. I’d just cut out this bullshit.

Google’s a bit of an exception, though.

Good point on Google. It has seemed, historically, that companies in monopoly positions have done a good amount of basic R&D, and we owe a lot of our current technology to those companies. I don’t know why, exactly. I’m guessing that it used to be due to regulation (although I could be wrong), perhaps it has to do with quirks of management in some monopoly companies (in the case of Google, I would wager it has something to do with the quirks of the founders).

Other than monopolies, I think it will be difficult.

(I hope no one tries to argue that Google isn’t a monopoly, I’m not going to fight if, but really now)

We have all of those things. Generally, we’re doing advanced work that falls into the category of research.

But it’s billable work that directly fulfills customer contracts, and thus cannot be regarded as R & D for tax purposes.

StGabe, you need citations for the following:

  1. R&D tax deductions change the total economy distribution of marketing vs. R&D dollars as a share of total corporate spend.
  2. Increased R&D spending of the type covered by the deduction leads to productivity growth.
  3. Subsidizing startups leads to productivity growth.

I don’t know where the hell you’re getting all this stuff; it sounds like the special pleading rationalizations that come out of corporate lobbyists.

To my knowledge this is not true in general for how projects are funded; projects are funded with a balanced risk profile. Marginal dollars don’t shift the overall risk exposure of the investment. Think it through - if a corporation for some reason has 10% more cash it wants to spend on R&D, on what planet is it going to spend it entirely on really risky projects? Applying your implied marginal high-risk strategy from the beginning companies would end up betting all their money on the riskiest projects, which is not remotely what happens.

So you are ok with government funding 100% of research grants but not ok with subsiding 15% of corporate R&D projects. Bizarre

The crunchier french fries I mentioned actually are the result of a research grant to a MIT professor in nanotech. He took the results worked out a licensing deal with MIT and than tried to commercialize them. I suspect he would have had tough time getting a second round of venture funding, if the companies didn’t have some tangible assets in the form of embedded tax credits.

Without these incentives I suspect the almost none of the money we spend on research grants would have any positive impact on society, beyond satisfing the intellectual curiosity of professors and filling up academic journals.

I think Jason would agree with me that the government should mandate that any research grants subsidized to that extent by the government should go public domain in very short order, if not immediately.

I’m not picky about the specifics; society can work out something for that subsidized research grant stuff. I’m just focusing on what, exactly, we theoretically get as an outcome before even getting to ROI. I don’t see any real benefit to subsidizing economy-wide “R&D inside corporations.” The two classes as described (nanotech research - speculative, unprofitable, single company can’t capture value vs. failed Google social media projects - concrete, profitable, single company gets entire value) have virtually nothing to do with each other. Why on earth should the rest of society be subsidizing Microsoft’s Kinect productization, for example?

“Second round of venture funding to take government research grant idea further” just sounds like another grant to me.

Cause society expects to get 35% of Kinect profits (and it is probable that not all of the Kinect engineering spending is eligible). I’d say the society benefits significantly more from having Microsoft hire an engineer to improve Kinect, than have Microsoft buy another TV spot promoting Xbox.

The big difference between the two research grants is that taxpayers on the hook for 100% of the cost of the first grant, and only 10% or so of the second grant, dumb investors like me are on the hook for 90%.

  1. The unemployment rate is determined by the central bank, not tax policy.
  2. Society’s benefit is the aggregate increase in total productivity from said investment, adjusted for distribution issues; not whatever tax revenues it might later throw off.
  3. Still no evidence R&D tax deductions lead to changes in marketing vs. R&D distribution. I don’t know where you’re getting this focus on marketing in the first place.

Citations needed.

Seriously that card is bullshit. Go back and cite every claim you’ve made in the “EU is fucked” thread first and then I’ll worry about data here.

Curious: do you think that tax incentives like mortgage deductions or tax credits can increase home ownership? If not, then what’s the difference between home ownership and R&D?

Of course this conversation isn’t really about R&D credits as it is all too evident by your shifting argument as you figure out what the R&D credit actually is about and statements like “it sounds like the special pleading rationalizations that come out of corporate lobbyists”. This is about an axe that you have to grind with corporate tax policy. I probably don’t even disagree with you in general (for example I think it’s ridiculous how well Google is able to shift their income around to get down below a 3% effective tax rate) but you’re still making a really stupid argument about this general tax credit for R&D.