In a tech-driven global economy, America’s prosperity depends on its ability to innovate with speed and at scale. The business environment—for example, the level of taxes and regulation—can help or hinder private sector efforts to develop and commercialize new technology, as well as the Nation’s ability to attract global business investment. Winning the two-front global competition for markets and capital is vital for U.S. economic growth and high-value job creation.
Recently, the Council on Competitiveness’s “National Commission” issued a call to action with a comprehensive portfolio of strategic recommendations, organized within “7 strategic pillars” that support the country’s innovation and competitiveness potential. The second pillar’s grouping of recommendations calls for “Creating the Most Competitive Business Climate for Innovation” with financial and investment incentives that drive technology development, deployment at scale, new business formation, and the establishment of state-of-the-art production facilities. Three key areas of action are particular significance and priority:
First, cut the Federal deficit. According to the Congressional Budget Office (CBO), the Federal budget deficit in FY 2024 was $1.9 trillion – 6.6 percent of U.S. gross domestic product (GDP). The CBO projects by 2035 the Federal budget deficit will remain above 6 percent of GDP—a level significantly higher than the 3.8 percent that deficits have averaged over the past 50 years. At the same time, while facing serious financial constraints, we must make investments: to sustain our world-leading position in science and technology; to preserve our military strength in research and dual-use technology; to build 21st century science and technology infrastructure; and to grow and optimize innovation ecosystems in every corner of the nation, strengthening the country’s overall innovation capacities and capabilities.
The overarching goal for the United States should be to reduce the Federal deficit, by 2027, to a sustainable level of 3.7 percent of U.S. GDP, while increasing investment in the Nation’s science and technology enterprise – a proven driver of long-term productivity and economic growth. And building on this, recent economic studies suggest scaling AI could result in substantial, new output and productivity gains, offering pathways for U.S. deficit reduction.
Second, nurture a business climate that drives investment in research and technology development, venture capital, and modern facilities and equipment. The U.S. financial ecosystem has given the United States a significant global competitive and technological edge. For example, the United States invests more in R&D than any nation, and accounts for a 52 percent share of global venture capital funds raised compared to China’s 40 percent and the EU’s 5 percent.
To maintain the powerful financial and investment incentives that have helped propel the United States to technology superpower status, we should:
- Maintain the 21 percent corporate tax rate, and institute a 25 percent investment tax credit for new machinery and equipment. Prior to 2017, the United States had a 35 percent corporate tax rate, the highest in the advanced economies. The 2017 tax act cut the corporate tax rate to 21 percent, helping ensure U.S. companies remain cost competitive globally and the nation remains a premiere location for new business investment. We should eliminate double taxation of U.S. corporate profits earned overseas, and create new tax and fiscal incentives for U.S. manufacturing, including re-shoring and new Enterprise Zones to encourage the formation and growth of innovation clusters.
- Double the Research and Experimentation (R&E) Tax credit, restore expensing, and expand the refundable R&E tax credit for pre-profit start-ups to bolster our capacity for research and advancing new technology. A National Innovation and Infrastructure Bank could help move emerging technologies over “the valley of death” to their commercialization.
- Restore the Federal R&D investment intensity (R&D as a percent of GDP) to its historic highs to underpin the science and technology of tomorrow. Even as the economy has grown and become more technology-intensive, the Federal R&D investment as a percent of GDP has been on a 50 year structural decline from its high of 1.86 percent of GDP in 1964—a time of great geostrategic competition, and high U.S. scientific and technological ambition—to 0.62 percent in 2023, even as we face greater competitive, societal, and national security challenges, and greater opportunities for innovation across the economy. One contribution could come from fully appropriating the ”Science” components of the CHIPS and Science Act which, among other things, authorizes $174 billion in R&D, STEM education and training, and workforce development, including more than $80 billion for the National Science Foundation and $67 billion for the Department of Energy over five years.
- Streamline regulation, and reduce its costs and burdens on U.S. businesses and entrepreneurs. U.S. companies must chop through a thicket of Federal regulation, estimated to cost as much as eight percent of U.S. GDP.[i] These costs impede business investment and growth, and pose barriers to entry for start-up firms. Money shaved off regulatory compliance would free funds, allowing companies to allocate more resources to research and innovation.
Third, invest in public data collection and increase the use of hard data for policymaking, to gauge the impact of innovation investments and regulation, and to understand better the complexities operating within the economy. With an expanding government role in innovation and the economy, government officials who develop and implement national, state, and international laws, regulations, and policies do not always fully understand the impact of these actions.
In addition, leaders, planners, and program managers in numerous domains rely on data from Federal statistical agencies that have faced funding challenges, even as the economy evolves, statistical series are developed, and new data series and special data studies may be needed. For example, the Commerce Department’s Bureau of Economic Analysis—a data pioneer on the digital economy—produced in the past few years data series on the space economy, the marine economy, and global value chains. The data revolution and its tools, and the availability of micro-data are a boon to researchers and analysts in numerous fields, providing an unprecedented level of insight into the “atoms, physics, and circuitry” of the economy.
We have a golden opportunity to rev-up America’s high-performance engine of innovation, business growth, and global competitiveness. Let’s create the environment that will put the pedal to the metal.
[i] Why We Need a Regulatory Budget, Competitive Enterprise Institute, July 30, 2024.
