The United States has the most damaging business tax system in the developed world because it taxes its businesses at high rates, taxes them on their worldwide income and denies them the ability to deduct the cost of their investments at the time they make them.
There is wide agreement that business tax reform could yield enormous economic benefits that would raise wages and increase opportunities for American families.
Yet rather than focus on fixing these problems, Congress is reportedly dithering by trying to create what is known as a “patent box.”
A patent box (sometimes called an “innovation box”) would give businesses a lower tax rate on income they earn from certain intangible property, such as patents, copyrights, trademarks and many other categories as long as they developed and housed that intangible property in the United States.
The idea is to encourage businesses to conduct more research and development here in the United States and to thus potentially create more jobs. Many European countries, including Ireland, the United Kingdom, France and the Netherlands, already have patent boxes.
The problem with patent boxes is twofold.
First, all forms of income, no matter how derived, should be taxed at the same rate. Giving a preferential rate to income earned because of intangible property is another example of government picking winners and losers.
A patent box would be akin to states that give enormous tax breaks to companies that agree to move there. Giving preferential rates to some businesses or some types of income means that other businesses or other types of income must bear higher rates to raise a given amount of revenue. This distorts the economy and makes it less productive.
Second, determining how much income a business derives from its intangible property would be extremely complicated.
It likely would follow guidelines similar to those laid out in the transfer pricing rules. But those rules already are under enormous stress because of the increasing importance intangible property plays in the income of businesses. They were designed for a world where businesses made money by selling physical products that required little intangible property; not the modern world where it is increasingly important.
If it were to initiate a patent box, Congress would need to write even more complex rules to prevent businesses from abusing it. There is little chance Congress, or the Treasury for that matter, has the ability to write such complex rules.
A patent box would be unnecessary if Congress focused on what is most important: lowering business tax rates and establishing a territorial system.
If it did those things, domestic investment would boom and job creation and wages would soar for all American workers without the need for such a narrowly targeted tax break. Instead, it is pursuing a policy that will help only a few industries that derive their income mostly from intangible property, such as pharmaceuticals and tech, and will yield little benefit for the American people.