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Memorial research to support Barack Obama's tax reforms

By Moira Finn

If U.S. manufacturers enjoy new research and development tax breaks in the coming years, then Faculty of Business Administration accounting professor Dr. Jeffrey Pittman deserves some thanks.

United States President Barack Obama referenced Dr. Pittman's research on tax credits and private sector investment in innovation recently to help make his case for a business tax reform proposal.

A permanent Research and Experimentation (R&E) Tax Credit for U.S. companies is a key recommendation of The President's Framework for Business Tax Reform. The recommendation was unveiled by the White House on Feb. 22 and is meant to encourage American companies – particularly American manufacturers – to invest in research and development (R&D) programs.

An R&E tax credit already exists in the U.S. system, but it is temporary – it has been extended 14 times since its introduction in 1981. The Obama Administration is now proposing a permanent credit to boost confidence and encourage businesses to invest in long-term research and development programs in the hopes of stimulating economic growth in the United States.

As empirical support for the tax credit proposal, the framework cites the article A Cross-National Comparison of R&D Expenditure Decisions: Tax Incentives and Financial Constraints by Dr. Pittman and his co-authors, Drs. Kenneth Klassen, University of Waterloo, and Dr. Margaret Reed, University of Cincinnati, published in 2004 in Contemporary Accounting Research, a major business journal.

The president's framework quotes the researchers' evidence suggesting that "the R&E tax credit ... is a cost-effective policy for stimulating additional private sector investment. Most recent studies find that each dollar of foregone tax revenue through the R&E credit causes firms to invest at least a dollar in research and development, with some studies finding a benefit to cost ratio of 2 or 2.96."

Dr. Pittman, who holds the Certified Management Accountants' Professorship in Accounting designation, said that the paper has been highlighted in several public policy discussions since its publication.

"In this project, one of our purposes was to examine the links between tax credit incentives and R&D expenditures in the United States and Canada. Our evidence implies that the Canadian and American tax systems generate, on average, $1.30 and $2.96 of additional R&D spending for every dollar of taxes foregone, respectively," he said.

"While it stands to reason that a more permanent R&E tax credit arrangement would further enhance this outcome, it is by no means a certainty. Naturally, I'm interested in seeing how the discourse on the best ways to finance innovation through corporate tax incentives unfolds during this election year in the U.S."
Dr. Jeffrey Parsons, University Research Professor and associate dean, Faculty of Business Administration, research, congratulated Dr. Pittman on his work.

"Jeff has a record of publishing in top-tier management journals and it is gratifying to see the significance of his work acknowledged in such a high-profile manner and, more generally, to see the impact of business research on the public policy debate highlighted as well."

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