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Attacking Innovation ATTACKING INNOVATION XUAN-THAO NGUYEN & JEFFREY A. MAINE ABSTRACT Economists generally agree that innovation is important to economic growth and that government support for innovation is necessary. Historically, the U.S. government has supported innovation in a variety of ways: (1) a strong legal system for patents; (2) direct support through research performed by government agencies, grants, loans, and loan guarantees; and (3) indirect support through various tax incentives for private firms. In recent years, however, we have seen a weakening of the U.S. patent system, a decline in direct funding of research, and a weakening of tax policy tools used to encourage new innovation. These disruptive changes threaten the future of innovation in the United States, potentially driving innovation activities offshore to Europe and China. This Article concludes that the current innovation crisis demands changes to both the patent and tax systems in order to instill confidence in the innovation landscape. Gerald L. Bepko Chair; Director, Center for Intellectual Property & Innovation, Indiana University Robert H. McKinney School of Law. As always, Professor Nguyen would like to thank Erik Hille and Khai-Leif Nguyen-Hille. Maine Law Foundation Professor of Law, University of Maine School of Law. Professor Maine would like to thank Joe Greene and Anna Mikhaylina for providing valuable research and editorial assistance. 1687 1688 BOSTON UNIVERSITY LAW REVIEW [Vol. 99:1687 CONTENTS INTRODUCTION ............................................................................................. 1689 I. GOVERNMENT SUPPORT OF INNOVATION .......................................... 1694 A. A Strong and Inclusive Patent System for Innovation ............... 1696 B. Direct Funding of Basic and Applied Research ........................ 1706 C. Tax Incentives for Innovation .................................................... 1709 1. Special Rate Treatment for Innovation Gains ..................... 1710 2. Tax Deduction for Qualified Research Spending ................ 1713 3. Tax Credit for Increases in Research Spending ................... 1716 II. THE ATTACK ON AMERICAN INNOVATION ........................................ 1721 A. Weakening of the Patent System Under the Disguise of Innovation .................................................................................. 1721 B. Decline in Basic and Late-Stage Research and Development Funding ..................................................................................... 1729 C. Weakening Tax System Governing Innovation .......................... 1732 1. Elimination of 100% Expensing of Innovation Costs ......... 1734 2. Elimination of Capital Gain Treatment for Innovation Dispositions ......................................................................... 1738 3. Failure to Enhance the Research Credit to Maximize Its Effectiveness ....................................................................... 1741 4. Failure to Enact a U.S. Patent Box ...................................... 1743 5. Base Erosion Measures in Response to Intellectual Property Income Shifting ................................................................... 1746 III. IMPLICATIONS .................................................................................... 1749 CONCLUSION ................................................................................................. 1754 2019] ATTACKING INNOVATION 1689 INTRODUCTION Twelve years ago, there were about 700,000 new start-up firms every year in the United States, according to the Ewing Marion Kaufman Foundation, but that number has fallen 30% to 500,000 firms and continues downwards.1 In a study conducted by the Chronicle of Higher Education, more than half of the 11,000 researchers surveyed across the nation had abandoned projects central to their labs due to economic pressure.2 In the study entitled The Future Postponed, MIT delivered a shocking list revealing that none of the notable scientific highlights in recent years were U.S.-led achievements.3 The data confirms a new reality that not many care to acknowledge: innovation in the United States is dwindling.4 Several key reasons for this dire situation stem from the multiple and pervasive attacks on innovation. Most startlingly, the attacks are often in disguise as benefiting innovation.5 As a result, there has been an almost universal 1 Carl J. Schramm, Professor at Syracuse Univ., Former President, Ewing Marion Kaufman Found. for Entrepreneurship, and Bd. Member, IIPCC, Presentation at International IP Commercialization Council Program on Promoting Innovation, Investment and Job Growth by Fixing America’s Patent System: Entrepreneurship, IP and the Benefits to the U.S. Economy 6-7 (May 8, 2017) (transcript available at https://www.dropbox.com/sh /qnz1q7jtr32gtz5/AADP7ROru1xhneHIrsu9Zlqla?dl=0&preview=IIPCC+WDC+May+8+2 017+-+Prof+Carl+Schramm+Presentation+Transcript.PDF [https://perma.cc/7Y5A- TRNL]); see also Jane Wollman Rusoff, ‘Burn the Business Plan’ When Starting Your Own Firm: Carl Schramm, THINKADVISOR (Mar. 1, 2018, 10:29 AM), https://www.thinkadvisor.com/2018/03/01/burn-the-business-plan-when-starting-your-own- firm/ [https://perma.cc/GMB7-4QFQ] (“Twenty years ago the U.S. was benefiting from one 1 million startups a year. Ten years ago it was about 700,000 a year. This year there will be fewer than 500,000 startups.”). 2 Paul Basken & Paul Voosen, Strapped Scientists Abandon Research and Students, CHRON. HIGHER EDUC. (Feb. 24, 2014), https://www.chronicle.com/article/Strapped- Scientists-Abandon/144921 (“Nearly half [of survey respondents] have already abandoned an area of investigation they considered central to their lab’s mission.”). 3 MIT COMM. TO EVALUATE THE INNOVATION DEFICIT, THE FUTURE POSTPONED: WHY DECLINING INVESTMENT IN BASIC RESEARCH THREATENS A U.S. INNOVATION DEFICIT, at v (2015), https://dc.mit.edu/sites/default/files/Future%20Postponed.pdf [https://perma.cc /L6LZ-5NSP] (listing achievements such as “discovery of a new fundamental particle” and “development of the world’s fastest supercomputer”). 4 MIT has documented the innovation crisis by providing tangible examples of: under-exploited areas of science and likely consequences in the form of an innovation deficit, including: opportunities with high potential for big payoffs in health, energy, and high-tech industries; fields where we risk falling behind in critical strategic capabilities such as supercomputing, secure information systems, and national defense technologies; areas where national prestige is at stake, such as space exploration, or where a lack of specialized U.S research facilities is driving key scientific talent to work overseas. Id. at v-vi. 5 See Charles Duhigg & Steve Lohr, The Patent, Used As a Sword, N.Y. TIMES, Oct. 8, 2012, at A1; James Bessen, The Evidence Is In: Patent Trolls Do Hurt Innovation, HARV. 1690 BOSTON UNIVERSITY LAW REVIEW [Vol. 99:1687 silence in legal scholarship on how law and policy have discouraged innovation, which has led to the current innovation crisis. This Article breaks that silence. First, there has been a fierce attack in patent law, where strong patents were once considered incentives for innovation.6 The attack on the patent system cloaked itself in the hysterical “patent troll” narrative that patent owners behave like trolls to extort innovative companies,7 without any consideration of the fact that these infringers are using others’ patented technologies without BUS. REV. (Nov. 2014), https://hbr.org/2014/07/the-evidence-is-in-patent-trolls-do-hurt- innovation [https://perma.cc/T7MT-44TG] (calling for change to patent law to address patent trolls); Larry Downes, The U.S. Supreme Court Is Reining in Patent Trolls, Which Is a Win for Innovation, HARV. BUS. REV. (June 2, 2017), https://hbr.org/2017/06/the-u-s-supreme- court-is-reining-in-patent-trolls-which-is-a-win-for-innovation [https://perma.cc/L7YH- BUPS] (arguing that recent changes to law “will improve the innovation environment for companies in fast-changing industries”); Patents, ELECTRONIC FRONTIER FOUND., https://www.eff.org/patent [https://perma.cc/K8DB-CQ8S] (last visited Aug. 22, 2019); Richard A. Posner, Why There Are Too Many Patents in America, ATLANTIC (July 12, 2012), https://www.theatlantic.com/business/archive/2012/07/why-there-are-too-many-patents-in- america/259725 [https://perma.cc/CEY8-YX3V]; Gene Sperling, Taking on Patent Trolls to Protect American Innovation, WHITE HOUSE (June 4, 2013, 1:55 PM), http://www.whitehouse.gov/blog/2013/06/04/taking-patent-trolls-protect-american- innovation [https://perma.cc/77YS-HHXS]. 6 Some have called for the abolishment of the patent system. See generally MICHELE BOLDRIN & DAVID K. LEVINE, AGAINST INTELLECTUAL MONOPOLY (2008) (questioning whether legal intellectual property regime achieves intended purpose of creating incentives for innovation); ADAM B. JAFFE & JOSH LERNER, INNOVATION AND ITS DISCONTENTS: HOW OUR BROKEN PATENT SYSTEM IS ENDANGERING INNOVATION AND PROGRESS, AND WHAT TO DO ABOUT IT, at xi (2004) (suggesting that current patent policy and practice is generating seriously negative consequences for inventors). 7 The hysteria continues to persist in academia and the media. See, e.g., Eduardo Porter, Patent ‘Trolls’ May Be Poised For Comeback, N.Y. TIMES, Nov. 22, 2017, at B1 (“Companies no longer have to pay ransom so the threat of lawsuits over dubious royalty payments—filed by aggressive litigants known as trolls—will go away.”); see also Peter Detkin,
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