IP folks don’t talk enough with tax-law folks, and vice versa. This has some unfortunate results. IP has become a leading tax-avoidance vehicle, without drawing sufficient notice from IP scholars and practitioners. And R&D tax incentives are rarely evaluated alongside patents, prizes, and research grants as effective ways to foster innovation.
An insightful article forthcoming in the Texas Law Review, by Daniel Hemel and Lisa Larrimore Ouellette, takes a big step in bridging this gap. They observe that all innovation incentives can be broken down along three dimensions: (1) who decides (government vs. the market), (2) when paid (ex ante vs. ex post), and (3) who pays (government vs. users). For example, patents are market-driven, with money delivered ex post, from users of the patented technology. By contrast, R&D tax incentives are market-driven, with money delivered ex ante, from the government.
These three dimensions lead to a 2 x 2 x 2 matrix, suggesting a total of eight types of innovation incentives. But only five are currently used: patents, prizes, research grants, R&D tax incentives, and patent boxes (which provide favorable tax rates on patent income). As a result, Hemel and Ouellette’s taxonomy suggests three new mechanisms to encourage innovation. Their taxonomy also teases out some exciting new insights on the relative merits of existing innovation incentives, including some previously overlooked benefits of R&D tax incentives.