Theorizing Tax Incentives for Innovation 36 Virginia Tax Review 2017

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36 Va. Tax Rev. 25 (2017)
Theorizing Tax Incentives for Innovation

handle is hein.journals/vrgtr36 and id is 31 raw text is:

THEORIZING TAX INCENTIVES FOR INNOVATION

Jacob Nussim and Anat Sorek*

Innovation represents a market failure, and hence is supported by
governments. Several mechanisms are used to encourage innovation in
society: intellectual property rights, cash-based transfers (e.g., prizes and
grants), and tax incentives. Tax incentives are widely employed in the U.S.
and elsewhere and recently their use has been expanding. This article
reexamines the desirability of tax incentives as a tool to promote
innovation. It shows that tax incentives are a subset of cash transfers, and.
that they differ from other cash-based instruments only by design choices.
Therefore, a normative choice between innovation-inducing tax incentives
and cash transfers should be grounded in identifiable systematic constraints
on the design of tax or cash instruments.
This article adopts a theoretical basis - an organizational theory of
government - for such systematic constraints. It then applies the
organizational theory to the normative choice between cash and tax
incentives for innovation. The general conclusion of the theoretical analysis
casts serious doubts on the social desirability of existing practices of
promoting innovation through tax incentives, and explains why non-tax
cash-transfers are most likely socially superior.

TABLE OF CONTENTS

I. INTRODUCTION ....................................................................... 26

II. INNOVATION INDUCING MECHANISMS .........................................31
A. Intellectual Property Rights (IPR) ........................................ 33
B. Cash-Based Transfers (CBT) ................................................. 33
C . Tax Incentives ....................................................................... 34

Jacob Nussim, Bar-Ilan University. Anat Sorek, S. Horowitz & co., Law Firm
(Israel). We are grateful to participants of the Oxford University Centre for Business
Taxation 2015 symposium and the National Tax Association Annual Conference on
Taxation 2015 for their helpful comments and discussions.