Don’t Put American Innovation in a Patent Box: Tax Policy, Intellectual Property, and the Future of R&D

In an increasingly global economy, national governments are searching for ways to keep corporations from moving highly valuable intellectual property and associated economic activity to lower tax jurisdictions. In particular, governments are concerned with losing jobs, investment that fosters innovation, and the tax base attributable to income arising from intellectual property. One proposed solution is a patent box, also called an innovation box. A patent box lowers the rate of corporate income taxes paid on income originating from targeted intellectual property.

Congress is considering adding a patent box to the US corporate tax code to keep mobile intellectual property from leaving the United States and to further support domestic innovation. Rather than a solution to the problem, the patent box is a poor substitute for much needed holistic corporate income tax reform. International experiences with patent boxes have not demonstrated they are able to remedy any of the problems they aim to fix. The academic literature suggests that a patent box will not improve measures of job creation, innovation, or tax revenue. A better approach to encourage innovation, research, and development would be to lower the corporate tax rate for all businesses.

The system for US corporate income taxation is broken and should be repealed or replaced. If they are unable to fundamentally overhaul the corporate tax system, policymakers should follow two simple guidelines for reform: lower the statutory rate to reduce inefficient incentives, and work to remove additional complexity.

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