As cuts to NIH funding and Trump’s drug pricing executive order risk innovation, new Schaeffer Center white paper analyzes how tax policies influence medical breakthroughs
Amid increasing concern about how Trump administration policies could undermine new drug development, a new white paper from the USC Schaeffer Center for Health Policy & Economics examines how tax policies could support America’s leadership in biomedical innovation.
The researchers find that lowering corporate income tax rates may be more effective in encouraging innovation than commonly used tax strategies. Among their top findings:
- Reducing corporate income tax rates likely increases the number and quality of biomedical patents within the United States, largely by drawing innovation investment away from other countries.
- Targeted research and development (R&D) tax credits intended to stimulate innovation investment appear to boost R&D spending, but they do not significantly increase innovation. Many companies may simply reclassify existing spending as R&D to qualify for tax credits, and smaller, less-profitable firms that often drive biomedical innovation are unable to take advantage of these credits.
“Fostering a competitive biomedical industry is critical for American patients and has positive spillover effects throughout the United States. Our research shows that reducing corporate tax rates, rather than tariffs or other punitive measures, is an impactful strategy to draw private-sector investment in innovation into the U.S.,” said lead author Darius Lakdawalla, chief scientific officer at the Schaeffer Center and professor at the USC Mann School of Pharmacy and Pharmaceutical Sciences and the USC Price School of Public Policy.
The white paper comes amid congressional debate over sweeping tax legislation that could affect companies’ R&D decisions. For instance, the version recently passed by the U.S. House of Representatives would temporarily allow businesses to immediately write off domestic R&D expenses. But there have also been critical funding changes at the National Institutes of Health, which has historically bolstered private investment in high-risk, high-value biomedical research, and the administration’s plan to tie drug prices to those paid abroad could stifle innovation.
To increase private investment in new biomedical technologies, the white paper recommends policymakers consider R&D appropriations or improving skilled labor supply to help highly innovative startups that may not benefit from traditional corporate tax policies.
It also advises caution on tax policies that are not shown to significantly stimulate innovation—such as tax reductions on IP-related income or tax incentives to repatriate foreign earnings—or those that may hurt innovation, such as some anti-tax avoidance policies.
Researchers said the long-term innovation impacts of the most recent major tax policy reform, the 2017 Tax Cuts and Jobs Act (TCJA), will take time to understand, since investment and innovation activities can take years to implement and appear in data. While the law included a historic tax cut that aligned the U.S. corporate income tax rate with that of international peers, the resulting innovation benefits could be offset or even reversed in some cases by TCJA’s limits on R&D deductions.
Other authors include Karen Mulligan and Drishti Baid. This white paper was supported by the Schaeffer Center. A complete list of supporters of the Schaeffer Center can be found in our annual report (available here).
