In what was certainly a tortured process, the Congress and the White House have completed work on legislation to avoid the so-called “fiscal cliff” and what economists predicted could have been a relapse into a national, if not global, recession. Importantly, this bill goes beyond recession avoidance and takes an important step toward stronger economic growth and job creation by renewing three key tax initiatives that expired at the end of 2011:
- The Research and Development (R&D) Tax Credit: The R&D tax credit is truly a skilled-jobs tax credit, with approximately 70 percent of the benefits of the credit attributable to salaries of educated professionals performing U.S.-based research. This credit leads to more innovations, patents, businesses, and jobs, and, as a result, tax revenue. Here at home and around the world, R&D tax incentives have been proven to effectively increase private-sector innovation and boost economic growth.
The United States was one of the first nations to realize the importance of spurring R&D through the tax code, putting in place the R&D credit in 1981. Throughout that decade, even though it was a temporary tax benefit, the U.S. had the most generous R&D tax incentive in the world. However, as the Information Technology and Innovation Foundation (ITIF) noted, other nations learned from our success and have not just copied us, but left us in their wake with more generous and permanent R&D tax incentives. Extending the U.S. R&D tax incentive through 2013 provides a strong signal to our economic competitors that the United States is serious about maintaining our global leadership in innovation.
- The Controlled Foreign Corporation (CFC) look-through and Subpart F active financing exceptions: Granted, these tax pieces sound like provisions that only tax lawyers and accountants would understand. Yet, their real-world impact is distinct and important. Look-through treatment of payments between related CFCs and the corollary exception for active financing income together have been critical for U.S.-based companies to compete in global markets. U.S.-based high-tech companies, for example, are global success stories, and these provisions are crucial to their ability to compete abroad and remain strong job-creators here at home.
These three temporary tax measures are integral to America’s global economic leadership as they position our country on the leading edge of innovation and help businesses to have a more level playing field with competitors around the world. But they are temporary measures, set to expire at the end of 2013, and are part of a tax code that is in dire need of reform. Extending through 2013 the R&D tax credit, as well as the CFC look-through and active financing exceptions, sets the stage for comprehensive corporate tax reform by the next Congress, which begins later this week.
Already, House Ways and Means Committee Chairman Dave Camp and Senate Finance Committee Chairman Max Baucus have shown their commitment to rebuild a tax system through bipartisan cooperation and focused on job creation. They understand that the U.S. tax code is central to U.S. companies’ ability to compete in the global marketplace.
Experts across the spectrum have noted that, properly structured, the U.S. corporate tax code can make U.S. companies more competitive and enable U.S. companies to invest more of their foreign earnings here at home. This approach overall would make the U.S. a more attractive place for investment, spark stronger economic growth and job creation, and create opportunities for businesses, large and small, to produce new goods and services for global markets.
So while we are pleased that the Congress and the White House took steps to avoid a recession, we are even more pleased they are taking the first steps toward an agenda of economic renewal in 2013. We’ve turned the calendar to a new year, and it’s time for our policymakers in the new Congress to get to work.