Academic journal article Stanford Journal of Law, Business & Finance

It Is Time for the United States to Implement a Patent Box Tax Regime to Encourage Domestic Manufacturing

Academic journal article Stanford Journal of Law, Business & Finance

It Is Time for the United States to Implement a Patent Box Tax Regime to Encourage Domestic Manufacturing

Article excerpt

In order to curb the outsourcing of industries and jobs, the United States must provide better incentives to encourage manufacturers to operate domestically. The United States is at a strategic disadvantage vis-à-vis many other industrialized nations that attract industry and jobs by taxing income from intellectual property sourced in those countries at a lower tax rate. This Article suggests that the United States should consider a patent box regime and outlines the benefits that such a regime should produce in terms of additional domestic manufacturing and job creation. The Article begins by discussing scholarly work that explores the link between domestic manufacturing and research and development, and explains why domestic manufacturing is critical to innovation. In turn, innovation leads to more productivity, higher paying jobs and lower unemployment. The next Section summarizes the significant features of the existing patent box tax regimes in certain European Union nations and China. Taking into account the positive attributes and deficiencies of the existing patent box regimes, the Article concludes by suggesting features that should be considered for inclusion in a U.S. patent box regime.

Introduction

The U.S. manufacturing industry has been migrating overseas for many years notwithstanding various government efforts to arrest the emigration. This is partly attributable to lower labor and production costs overseas compared with the United States. In many cases, what starts as an effort to reduce costs by outsourcing manufacturing, ends with the entire industry following the factories overseas. Once an industry emigrates, the United States diminishes, and maybe eliminates, its chances of becoming the home of the next generation of products based on that industry. In order to curb the outsourcing of industries and jobs, the United States must provide better incentives to encourage manufacturers to operate domestically. There is a common belief that innovation is the embryo of future follow-on innovation. Often missing from such an analysis is the recognition that manufacturing itself provides the fuel for future innovation. When manufacturing moves overseas, future followon innovation is lost and is difficult to recoup. One example of an industry where the United States is not competitive because the precursor industry emigrated overseas is lithium-ion batteries for hybrid and electric automobiles. Automobile lithium-ion batteries are based on battery technology developed for consumer electronics (e.g., laptop computers and cell phones) which, despite originating in the United States, have been developed and manufactured in Asia for the last thirty years. This Article suggests one step the federal government can take to assist in the revitalization of domestic manufacturing and innovation: adopt a lower corporate tax rate for worldwide profits attributable to domestically-manufactured goods based on patented technology - a.k.a., a patent box.1 Many countries already have adopted patent box regimes, including Belgium, China, France, Luxembourg, the Netherlands, and the United Kingdom. This Article begins by discussing scholarly work that explores the link between domestic manufacturing and research and development (R&D) and explains why domestic manufacturing is critical to innovation. The next Section of this Article summarizes the significant features of the existing patent box tax regimes in certain European Union nations and China. Taking into account the positive attributes and deficiencies of the existing patent box regimes, this Article will then suggest features that should be considered for inclusion in a U.S. patent box regime designed to encourage domestic manufacturing.

I. Geographie Link Between Manufacturing, R&D, and Innovation

Commentators have noted that when factories migrate overseas, both the R&D and the knowledge base of that industry eventually follow.2 This loss costs the United States the ability to develop the next generation of products based on the knowledge developed in the mature emigrant industries. …

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