U.S. Tax Policy: Responses to Questions by Russian Officials
Question 1: Is there evidence that tax benefits for industrial research and development encourage industry to invest in research?
Analyses of the effectiveness of tax benefits for industrial research in the United States have focused on the tax credit for research and experimentation. These evaluations assume that there are benefits to society from private sector research and assess the credit in terms of whether it increases research spending by companies.
Most of the early studies of the research tax credit published in the 1980s found that the credit may have encouraged additional research spending, but this increase in spending was relatively small. The research credit is effectively a reduction in the price of research. Most of the evidence from early studies found that research spending is not very responsive to price reductions. Results from those studies indicated that a one-percent reduction in the price of research would increase research spending between 0.2 and 0.5 percent. Using these estimates and information on the revenue cost of the research credit, one study estimated that during the early 1980s, the research credit stimulated between 15 and 36 cents of research spending for each dollar of tax revenue forgone.
Most recent studies indicate that the amount of research stimulated by the credit is larger than that reported by earlier research. Some studies estimate that one dollar of research spending stimulates one dollar of research spending in the short run and as much as two dollars in the long run. Some argue that these studies may provide more reliable estimates of the effectiveness of the credit than earlier studies because they analyze longer time periods and use more sophisticated methodologies. However, other studies do not support the claim
that one dollar of research credit encourages at least one dollar of research spending or provide inconclusive evidence on the mount of research spending stimulated per dollar of research credit. Thus, the recent evidence is mixed.
Most of the available studies evaluate the research credit as it existed prior to its redesign in 1989. There has been little evaluation of the incentive effect of the present design of the credit, although the new credit likely increased the incentives for research per dollar of revenue cost.
A problem with providing tax incentives for research is that they are difficult for tax authorities to administer. Defining qualified research is intrinsically difficult, so that the general definition remains vague and subject to disputes between taxpayers and tax authorities. Existing evidence suggests that in 79% of the cases in which the research tax credit was audited during the first half of the 1980s, the amounts claimed were adjusted downward by nearly 20 percent. A similar incentive for research provided instead through a grant program may be easier to administer, because review and oversight would be provided by persons with specialized knowledge of a particular industry or lines of work.
Question 2: What are the tax benefits for universities and non-profit research institutions and what is the rationale for these provisions?
The United States tax system contains a number of provisions that give favorable tax treatment to non-profit organizations devoted to scientific research. First among these is an income tax exemption. The United States generally taxes the income of corporations. However, a non-profit corporation can be exempt from corporate income tax if most of its activities further certain purposes specified by statute. Organizations that further scientific or educational purposes qualify for an exemption. Thus, institutes dedicated to scientific research and universities that conduct research in addition to training students are generally exempt from the corporate income tax. To retain this exempt status, they may not participate in political campaigns, lobby for legislative changes to any substantial extent, or give a profit interest in their activities to private parties.
Question 3: Is there evidence that the provision of tax benefits for universities and non-profit research institutions leads to economic pay-off?
We are unaware of research on this specific point. However, the presence of significant benefits to society from private research is well established in the literature. The complex and variable nature of these benefits makes them difficult to measure with precision.
Question 4: Under what circumstances are income generating activities at universities exempt from or subject to taxes?
The income tax exemption generally does not cover income earned from conducting business activities. That income is subject to the unrelated business income tax. For example, if a university owns a factory that manufactures products for sale to the public, the income earned from the factory would be subject to the unrelated business income tax. However, the tax law gives special protection to scientific research activities. Any income that a college, university, or hospital receives from conducting research is exempt from the unrelated business income tax even if the college, university, or hospital is selling its research services or research results simply as an income-producing business rather than as a purely scientific endeavor. Similarly, if any other type of exempt organization conducts basic research—as opposed to applied research—for a profit, the income earned from the research is exempt from the unrelated business exemption. The only special requirement for this exemption is that the organization conducting the basic research must make the results of the research publicly available.
Question 5: Under what circumstances are foreign grants to U.S. universities exempt from taxes? Under what circumstances are they subject to taxes?
The income tax exemption generally applies to income the scientific organization earns in the course of furthering scientific purposes. If a scientific research institute receives a grant to support its research, the organization pays no income on the grant. This treatment applies to any such grant from any source, domestic or foreign. Similarly, if a large university that focuses on science receives tuition payments from students, the university pays no income tax on the tuition.
Question 6: If universities receive gifts, such as gifts of land, are they restricted as to the use they can make of the gift?
To provide additional support for scientific activities and other activities that benefit the community at large, the US tax code allows taxpayers to take an income tax deduction for contributions they make to nonprofit organizations that serve charitable, religious, cultural, or scientific purposes. Thus, if an individual or a business makes a contribution to a nonprofit organization that conducts scientific research, the individual or business will be able to reduce the amount of income tax he, she, or it owes to the federal government. The gift may be of cash or property. The recipient must generally devote itself to serving scientific purposes, but the tax code does not impose specific limitations on what the organization may do with the gift. However, the tax code may limit or
reduce the deduction that the donor may receive depending on what the donor gives and how it is used. For example, the donor who contributes tangible personal property will get a smaller deduction if the recipient sells the property for cash than if the recipient uses the property to conduct its activities.
Source: U.S. Department of Treasury, May 1997