Ways and Means Oversight Beering, Steven C., M.D., President of Purdue Bissell, Richard A., Manager of Taxes, GCA Corporation, Boyd, John G., International Business Machines, Cooper, W. Paul, Chairman, Executive Committee, ACME- Cordes, Joseph J., Department of Economics, The George Washington University, Statement to the House Ways and Means Committee on the R&D Tax Credit, August 2, 1984..... Eisner, Robert, Prepared Statement, "The Research and Finch, Johnny C., Senior Associate Director, General 59 37, 41, 58 37, 58 68 13 25, 39, 67, 70 42, 43, 71 Hickey, John J., Executive Vice President and Chief Letter from John J. Hickey to William A. Kirk, Jr., Kahne, Stephen, Dean of Engineering, Polytechnic McKay, Charles A., Executive Vice President, the Mullin, Albert E., Jr., Vice President, Corporate Ross, Ian M., President, AT&T Bell Laboratories, 2, 17, 18, 45 37 59 44, 45, 51 37, 47, 49 57 73 45 Saloom, Joseph J., Senior Vice President, M/A-COM, Sumney, Larry A., Executive Director, Semiconductor Taylor, James A., Director of Taxes and Customs, Young, John A., President and Chief Executive Officer, behalf of the Computer and Business Equipment Committee on Ways and Means, August 3, 1984.... Letter from John A. Young to Chairman Charles B. Rangel, 29, 45 54, 56, 57 45 3, 37, 45, 51 37 Chairman RANGEL. Mr. Miller? STATEMENT OF MICHAEL I. MILLER, VICE PRESIDENT AND TREASURER, GOULD INC. Mr. MILLER. Mr. Chairman, I am Michael Miller, and I am vice president and treasurer of Gould Inc., a $1.3 billion electronics manufacturer based in Rolling Meadows, IL. Before I proceed, I would like to thank this distinguished subcommittee for the opportunity to express my views, and the views of Gould, on research and development tax incentives. Gould produces highly engineered, state-of-the-art goods. Consequently, by the very nature of our research intensive business, technological advancement is essential. In fact, a significant commitment to R&D in terms of both time and money is fundamental to Gould's ability to open and enlarge its markets. As all of you know, product development in high tech areas has been proceeding at a breakneck pace. Gould is no exception-fully two-thirds of our current products can be classified as new; that is, they were not even in existence 4 years ago. Gould's R&D figures themselves tell the story-1983 R&D spending was $155 million, or about 11.7 percent of sales. But research spending is important not only to Gould, but to our entire country. We feel that two major benefits accrue from research spending on a national level: one, the ability of American companies to compete in worldwide markets is enhanced ultimately leading to more jobs in the United States; and two, productivity is improved, thereby leading to higher levels of real wages and a higher standard of living for the American work force. For generations, the United States has been recognized as the world's technological leader. However, the record of technical innovation during the 1970's suggests that this lead has been eroded. Only half of the chief technical officers at major U.S. corporations believe America has been maintaining its technological lead over foreign competition, according to a recent study by the consulting firm of Heidrick and Struggles. These executives also felt insufficient R&D spending has been a major cause of low U.S. productivity and opined that the economic climate could support more R&D spending. Their premise that R&D is essential to productivity growth in the U.S. economy is not without support. A recent independent study by the Machinery & Allied Products Institute estimates that as much as 10 percent of our productivity slowdown during the 1960's was attributable to reduced R&D spending. The threat that imports pose to domestic industry is especially ominous because imports enjoy substantial competitive advantages due in large part to direct subsidization. Our international competitors have established government policies aimed directly at promoting high-technology growth. Consequently, during the decade of the 1970's the amount of R&D funding by our key foreign competitors increased at a significantly greater rate than the United States. The next question is whether the R&D credit actually spurs such spending. There is evidence suggesting that the answer is "yes". One survey conducted last year indicated that, for those companies utilizing the credit, R&D expenditures increased an average of 38 percent in the 1981-82 timeframe, over the pre R&D credit period of time. Standard and Poor's reported that domestic electronics companies during the severe recession of 1981-82 did not curtail R&D spending despite lower sales and earnings and severely strained capital budgets. This marked a departure from business practice during prior recessions where R&D cutbacks generally occurred, likewise a McGraw-Hill survey showed that there has actually been a significant increase in R&D spending. R&D expenditures increased nationally by 16 percent in 1981, 8.4 percent in 1982, and an estimated 8.2 percent in 1983. An important reason for the continued strength in R&D spending during this recessionary period, according to a National Science Foundation survey, is that, despite the high degree of economic uncertainty, lower profit levels, and higher interest rates, corporate R&D personnel were able to persuade management to protect R&D activities from internal corporate budget cuts during the economic downturn because of the more favorable tax treatment such projects receive under the credit, as compared with other discretionary company expenditures. For example, by comparison, during these same three years, capital spending on plant and equipment increased only 8.7 percent in 1981, and then decreased in 1982 and 1983. We think such statistics are indicative of the fact that American business leadership has become acutely aware of this credit and, consequently, that the priority of R&D, in competition for limited corporate funds, has increased. At Gould, for example, the results of all business divisions are measured on an after tax earnings basis. Thus, management at all levels is aware of the tax consequences of the conduct of R&D, and I can assure this subcommittee that the existence of the tax credit has increased the amount of resources at Gould which have been dedicated to research. We believe Congress should amend current law to make the R&D credit permanent. Most high-technology companies plan their research activities on a 3-to-5 year cycle, or even longer. At Gould, business plans are developed on a 5-year basis. The 1985 sunset may already be impairing the effectiveness of this incentive mechanism since the business planning horizon today typically extends beyond 1985. Admittedly, making the R&D tax credit permanent will result in a short-term loss of revenue to the Treasury. But this subcommittee should view R&D expenditures as an investment in the future. A modest short-term loss is being exchanged for a potentially robust long-term gain with increased employment, enhanced productivity and competitiveness, a reduced trade deficit and, ultimately, an expanded tax base. Thank you again for allowing me to express my opinions on this vital subject. Chairman RANGEL. Thank you, Mr. Miller. [The prepared statement and supplemental material follow:] |