What Does the R&D Tax Credit Do, Exactly?

I was going to write an Atlantic Flashcard on the R&D tax credit, which the president has proposed to expand and make permanent. But Ezra Klein beat me to the explanatory punch:

The Research and Development Tax Credit is a tax provision that gives companies that invest in research in the United States a credit on their taxes. It was put in place under the Reagan administration in 1982, because there was a feeling we weren't competing that well against the Japanese and the Germans. There are two versions, one of them, the simplified version, is more often used, and it's a 14 percent deduction above 50 percent of your research costs -- so more or less a 7 percent credit in net.

Economists favor the credit because there's a lot of evidence that companies don't capture all of the benefits from their research. Those benefits spill over to other companies and industries. So absence a credit, companies will underinvest in research. And the credit also affects where companies choose to do their research. We are now 17th in R&D credit generosity compared to the 30 OECD nations. A decade ago we were number one.

Read the full interview at Klein's blog.

Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Life as an Obama Impersonator

"When you think you're the president, you just act like you are above everybody else."

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

VIdeo

Life as an Obama Impersonator

"When you think you're the president, you just act like you are above everybody else."

Video

Things Not to Say to a Pregnant Woman

You don't have to tell her how big she is. You don't need to touch her belly.

Video

Maine's Underground Street Art

"Graffiti is the farthest thing from anarchy."

Video

The Joy of Running in a Beautiful Place

A love letter to California's Marin Headlands

Video

'I Didn't Even Know What I Was Going Through'

A 17-year-old describes his struggles with depression.

More in Business

Just In