130 • Impacts of Applied Genetics — Micro-Organisms, Plants, and Animals 
ment of capital gains taxes on the sales of these 
stocks if the proceeds are reinvested into simi- 
larly qualifying stock; and more liberal capital 
loss provisions. 
In addition to focusing on the supply of cap- 
ital, tax policy could attempt to directly increase 
the profitability of potential growth companies. 
Since most are not profitable for several years, 
they cannot take full advantage of the invest- 
ment tax credit— or even the provision for car- 
rying net operating losses back 3 years and for- 
ward 7 years to offset otherwise taxable profits. 
Two proposals may remedy this situation. First, 
the investment tax credit could be refundable to 
the extent it exceeded any tax liability of the 
firm. A preliminary estimate of the revenue loss 
for this proposal was $1 billion for 1979. Sec- 
ond, new companies could be permitted to 
carry net operating losses forward for 10 years. 
This change would give new firms the same 
number of years over which to deduct losses as 
established firms. 
The final type of tax incentive is directed at 
increasing R&D expenditures. Two major pro- 
posals would permit companies to take tax cred- 
its on a certain percentage of their R&D ex- 
penses, and on contributions to universities for 
research. 
The R&D credit has been advocated for sev- 
eral reasons. First, it would increase the after- 
tax return on R&D investments, making them 
more attractive. Second, it would reduce the 
degree of risk on such investments; with a 10- 
percent credit, the real after-tax expense of a $1 
million investment is $900,000. Finally, it would 
give firms maximum flexibility in selecting proj- 
ects for investment. 
Questions have been raised about the cost ef- 
fectiveness of the credit. For calendar year 
1980, the Treasury Department estimated the 
cost of a 10-percent R&D credit to be $1.9 bil- 
lion. Since R&D costs average only 10 to 20 per- 
cent of the total cost of bringing a new product 
or process to the market, the net reduction in 
the cost of commercializing an invention would 
be 1 to 2 percent. Moreover, the commercial 
stage of innovation is thought to be riskier and 
costlier than the technical stage. Another prob- 
lem is that the credit may be a windfall for firms 
that would be investing in R&D anyway. Finally, 
the credit would subsidize R&D devoted to 
minor product changes or incremental improve- 
ments in addition to R&D directed to more fun- 
damental breakthroughs. 
One of the provisions of a pending congres- 
sional bill (H.R. 5829) provides for a credit of 25 
percent for incremental research expenditures 
above those for a base period. By limiting the 
credit to incremental expenditures, the hill 
would create a more cost-effecti\e credit, if 
passed. 
The final type of tax credit would he for cor- 
porate contributions to university research. The 
Treasury Department estimated that a 25 per- 
cent credit for research in all fields would cost 
$40 million in 1980. This credit would he tar- 
geted to more fundamental research and not to 
the subsidy of short-term, incremental projects 
that are usually a significant |)art of corpoi’ale 
R&D budgets. 
E. Congress could improve the conditions under 
which U.S. companies can collaborate with 
academic scientists and make use of the tech- 
nology developed in universities in whole or in 
part at the taxpayer's expense. 
Developments in genetic engimuM'ing hav(‘ 
kindled interest in this oj)tion. Ne\ei'th(>l(\ss, the 
Government’s role in fostering uni\(M\sily-aca- 
demic interaction is far from accepted. Such a 
role may limit the flexibility of a (^oop(>rali\ c (‘f- 
fort. At the very least, disincentives siu'h as pat- 
ent restrictions could he remo\ ('d. 
The controversy has hecMi summed up as fol- 
lows:' 
At the next level of invoIvcMiienl, iIk' (io\crn- 
ment could identify [)otential partners, and fa- 
cilitate negotiations. A more active; role* would 
inv'olve the Government's pieniiling startup 
funds. Finally, the GovernmeMit could he a third 
partner, sharing costs with industry and the 
university. In this case, too laige* a Government 
role could lead to Fedeial interventioti in activ 
ities that should he the i(*sponsihility ol busi- 
ness and industry. 
'Dennis I’rager, (i. S. Omenn. Srirnrr 207 ;)7!t SK I eiKti 
