Increasing U.S. Competitiveness in the Age of Sequestration

September 2nd, 2014 | Posted by Sarah Jones in Uncategorized

NVTC is inviting members and industry leaders to serve as guest bloggers, sharing insights and information on trends or business issues relevant to other members. This week, MITRE CEO Al Grasso discusses repatriation as a means to maintain or increase domestic research spending.


Al Grasso, President and CEO of The MITRE.Corporation.

As the federal government trims support for research and development in response to budget pressure, U.S. competitiveness and productivity could take an unintended hit.  But there is an untapped gold mine that could offset the impact of budget cuts and channel fresh billions into research: nearly $2 trillion in accumulated offshore profits on the books of U.S. companies. One way to maintain or increase domestic research spending is to give industry an incentive to repatriate those foreign-held assets and invest in U.S.-based research activities.

House Ways and Means Chairman Dave Camp (R-MI) draft “Tax Reform Act of 2014” would do so by lowering corporate and individual tax rates, reforming U.S. international tax rules, and simplifying the tax code. While of great interest to policymakers and stakeholders, it is unlikely that such widespread reforms will be enacted soon. Hence, a smaller, near-term incentive is proposed while the debate rages over system-wide reform.

R&D seeds economic growth. A mature economy like that of the United States’ depends on its ability to discover and develop ideas that result in new technologies, pharmaceuticals and many other products.  It’s the key to maintaining U.S. leadership in an increasingly competitive global economy.

The federal government accounted for nearly a third (31 percent) of the nation’s spending on R&D, contributing more than $124 billion in 2009, the most recent year with complete data. While private industry invested $247.4 billion in U.S.-based R&D, private sector R&D is much more focused on development, rather than on basic research. In fact, only 21% of industrial R&D investments (some $50 billion) went toward basic and applied research.

Government has been more willing to invest in basic research, which is inherently more risky because practical applications may not be found until years or even decades later.  But the potential payoff is enormous.  The Internet can trace its origins to a basic research project in the early 1970s at the Defense Department’s Advanced Research Projects Agency.

The Budget Control Act and Sequestration will likely impose a 10-20 percent cut in government investment in research in coming years, and there is no ready replacement for those dollars.  Meanwhile, U.S. corporations with significant business operations abroad are awash in cash. A 2013 report by analysts at JPMorgan Chase & Co. estimated that all U.S.-based companies had $1.7 trillion in accumulated offshore profits. In addition, The Wall Street Journal reported last year that U.S. companies were accruing foreign held profits at a rate in excess of $150 billion annually.

In most cases, U.S. multi-nationals have not demonstrated great interest in repatriating the bulk of these profits due, at least in part, to the 35% tax that would be applied to foreign held profits (minus whatever tax a company already paid to a foreign government). Corporate leaders have long advocated a reduction or elimination of corporate taxes associated with repatriation, arguing that repatriated assets would be applied to job creation and investment in the U.S. However, a U.S. Senate review of a previous repatriation tax break in 2004 showed that companies simply increased spending on stock buybacks and executive pay.

So how can industry incentives be crafted to fill the research gaps created in critical technology areas as a result of reduced federal budgets? The answer: adopt a highly focused federal tax credit, in addition to current R&D credits, for repatriation of offshore profits re-invested in targeted research and development areas. The tax credit could be structured to provide variable benefit levels depending on the allocation of investments to basic and applied R&D in specific areas. So as not to repeat the outcomes of the 2004 repatriation tax break, the proposed tax credits must be awarded on accurate and measurable criteria tied to sustained investment directly associated with R&D spending in the targeted areas.

For U.S. companies to be willing to repatriate assets and invest in U.S.-based research, they must believe they will earn a better rate of return than they would by keeping assets overseas. Investing those dollars in basic research would create a funding pipeline that makes good sense for the country from an economic perspective, for companies and for jobs in the U.S.

If research tax incentives would lead to 20% of annually generated foreign profits being repatriated each year and even a smaller percentage of foreign held assets over a multi-year period, it could have a significant impact on domestic R&D spending. As a first step, a time-constrained tax holiday could be introduced to test the hypothesis, examine the accuracy and measurability of stated investments and refine the criteria for a more enduring policy.

If an appropriate implementation of an R&D based repatriation tax credit can be developed, it would promote continued U.S. competitiveness and productivity growth while also increasing the prospect for high tech jobs across the country despite declining federal research spending.

Approved for Public Release; Distribution Unlimited. Case Number 14-3037

Alfred Grasso is president and CEO of The MITRE Corporation. His affiliation is provided for identification purposes only, and is not intended to convey or imply MITRE’s concurrence with, or support for, the positions, opinions or viewpoints expressed.

©2014 The MITRE Corporation. ALL RIGHTS RESERVED.

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