Faculty of Business Administration research used to support US President's tax reform policies

Dr. Jeffrey Pittman

Dr. Jeffrey Pittman

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

United States President Barack Obama references Dr. Pittman's research on tax credits and private sector investment in innovation to help make the case for one of his business tax reform proposals.

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, which was unveiled by The White House recently and is meant to encourage U.S. companies – particularly manufacturers – to spend on research and development programs.

While an R&E tax credit already exists in the U.S. system, it is temporary – 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 U.S.

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, Dr. Kenneth Klassen (the University of Waterloo) and Dr. Margaret Reed (the 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 R&D, with some studies finding a benefit to cost ratio of 2 or 2.96."

Dr. Pittman, who holds the Certified Management Accountants' (CMA) Professorship in Accounting, 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 explains.

"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."

Congratulating Dr. Pittman on his work, university research professor and Faculty of Business Administration associate dean, research, Dr. Jeffrey Parsons, said, "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."

In addition to the R&E tax credit, The President's Framework proposes a number of taxation policy options intended to enhance the U.S. economy including closing tax loopholes, lowering corporate taxes while broadening the tax base and encouraging investment in manufacturing and innovation and developing green energy solutions.