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'''===Executive Summary'''===
• *There is no limited (if any) market failure associated with films closed-source computer software. Unless an outsider can review the source, the release of a piece of closed-source software does not provide information about the nature of the invention, save as through its observable functionality, and video tapeso cannot generate positive externalities.
• There is limited (if any) market failure associated with closed-source *Incentives for either computer softwareor patents creates a moral hazard problem. Unless an outsider can review the sourceTrivial code or patents, the release of a piece of closed-source software does that do not provide information about constitute true innovation, will be claimed by firm as the nature basis of the invention, save as through its observable functionality, and so cannot generate positive externalitiesproducts or processes in order to minimize taxes.
• Incentives for either computer software *Section 936(h)(3)(B)(i) implicitly includes trade-secrets through ‘invention, formula, process, design, pattern, or patents creates a moral hazard problemknow-how”. Trivial code or patents, that do not constitute true Providing incentives for firms to keep trade-secrets directly induces the market failures than much innovation, will be claimed by firm as the basis of products or processes in order policy is intended to minimize taxesmitigate. It also has an extensive moral hazard issue.
• Section 936(h)(3)(B)(i) implicitly includes trade-secrets through ‘invention, formula, process, design, pattern, or know-how”. Providing incentives for firms to keep trade-secrets directly induces the market failures than much innovation policy is intended to mitigate. It also has an extensive moral hazard issue.
• However, allowing deduction *Correctly allocating value (for associated example between services will induce moral hazard as it will be difficult, if not impossible, in practice to discern between directly associated services with externality-generating innovations and indirectly associated or unassociated servicesexternality-less innovations) is highly problematic. See below.
• Correctly allocating value (*Weighting deductions by R&D expenditure disincentivizes the creation of a market for example between services associated with externality-generating innovations and externality-less innovations) is highly problematic. See belowideas, where many participants act as intermediaries.
• Weighting deductions by R&D expenditure disincentivizes the creation of a market for ideas, where many participants act as intermediaries.
• Using bargained *Allocating value as to single component products is feasible. Many pharma products are associated with single patents, or a measure small number of allocable patents all held by a single manufacture. One can deduct manufacturing and other expenses at cost (one can assume that these are essentially competitively provided and so accrue no value beyond cost) to calculate component value . IP is straight-forwardestimated to account for 80% of value in some pharma. Thus patent licenses (even for portfolios)However, as well as infringed settlements bargained through the courts) could be rewarded by new legislationR&D tax credits already incentivize this activity.
• Allocating *Using bargained value efficiently to components as a measure of a multiallocable value is straight-component product forward. Thus patent licenses (‘other dispositions’even for portfolios) is, in general, an extremely difficult problem in economicsas well as infringed settlements bargained through the courts) could be rewarded by new legislation.
o *Allocating value efficiently to components of a multi-component product (‘other dispositions’) is, in general, an extremely difficult problem in economics. **Suppose that two firm’s patents are used to make a product and that the patents are complementary: one alone would make a product with $10 value but together they make a product with $40 value. How do you allocate the $20 complementarity created between the two of them?
• *Given information asymmetries between the firm and the tax collector, any allocation of value will lead to moral hazard.**Patents on ‘valueless’ inventions will be sought. Suppose that a firm can build a component using public domain knowledge or pursue an almost identical method that embodies the tiniest and least useful of inventive steps but that could be patented. As the patent would qualify the firm for a tax deduction on some allocation of the product’s value, the firm should pursue the patent.
o Patents on ‘valueless’ inventions will be sought. Suppose that a firm can build a component using public domain knowledge or pursue an almost identical method that embodies the tiniest and least useful of inventive steps but that could be patented. As the patent would qualify the firm for a tax deduction on some allocation of the product’s value, the firm should pursue the patent.[[Category:Innovation Policy]]
Feedback on the Innovation Promotion Act (view source)
Revision as of 12:20, 27 March 2017
, 12:20, 27 March 2017no edit summary
The Act, as written has a broad scope in terms of qualified property and gross receipts, and has three potential normative economic justifications.
Each rational only applies if qualified property is reduced to just patents. Including film and video, computer software, and trade-secrets in the Act drastically undermines it. Moreover, implementation under any rational is infeasible for gross receipts from ‘other dispositions’, particularly the sale of complex products that embody a great deal of intellectual property.
===Economic Foundations===
Innovation suffers from market failure due to information problems and positive externalities. As such, we expect innovation to be underprovided by private firms, relative to social optimal levels. Policy to increase innovation, like patent policy and R&D tax credits, may still not increase innovation to optimal levels. Thus Innovation Tax Boxes could have a role to play.
This final economic justification is very attractive, at least if the Act could be realigned to it. However, one immediate issue would be whether or not the deduction should be weighted by R&D expense. Specialization would require entities that do not conduct R&D. But this may encourage another kind of moral hazard: abuse of patents and “trolling” behavior
===Questions and answers===
Question: The proposal includes a broad definition of “qualified property” for purposes of determining qualified gross receipts. Is that the appropriate scope of intellectual property that should qualify for the deduction?
Answer: '''No. Any scope beyond just patents has little if any normative economic justification. Even patents suffer from a moral hazard issue.''' *There is no market failure associated with films and video tape.
Question: To what extent should gross receipts from services that are directly related to a product that uses qualified property be included in the determination of qualified gross receipts?
Answer: '''It depends. Innovation is invention followed by commercialization. To the extent that a service is associated (directly or indirectly) with the commercialization of an invention, incentivizing such a service with a tax deduction will incentivize innovation.''' *However, allowing deduction for associated services will induce moral hazard as it will be difficult, if not impossible, in practice to discern between directly associated services and indirectly associated or unassociated services.
Question: What would be the appropriate approach in determining the expenses properly allocable to innovation profits? Should the proposal just include authority for the Secretary to adopt allocation rules or is more specific guidance necessary?
Answer: '''There is no appropriate approach, save as in very in specific instances, nor are there any well-founded rules for the Secretary to adopt. It is essentially impossible to design welfare-maximizing rules that have generally applicability for ‘other dispositions’. • Allocating value to single component products is feasible. Many pharma products are associated with single patents, or a small number of patents all held by a single manufacture. One can deduct manufacturing and other expenses at cost (one can assume that these are essentially competitively provided and so accrue no value beyond cost) to calculate component value. IP is estimated to account for 80% of value in some pharma. However, R&D tax credits already incentivize this activity.'''
