Changes

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.

**There is limited (if any) market failure associated with 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 so cannot generate positive externalities.

**Incentives for either computer software or patents creates a moral hazard problem. Trivial code or patents, that do not constitute true innovation, will be claimed by firm as the basis of products or processes in order to minimize taxes.

**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.

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.

**Correctly allocating value (for example between services associated with externality-generating innovations and externality-less innovations) is highly problematic. See below.

**Weighting deductions by R&D expenditure disincentivizes the creation of a market for ideas, where many participants act as intermediaries.

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.

**Using bargained value as a measure of allocable value is straight-forward. Thus patent licenses (even for portfolios), as well as infringed settlements bargained through the courts) could be rewarded by new legislation.

**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.