Pillar 2 Overview
A robust pro-innovation policy framework drives investments to create new products and services, which creates high-value jobs and makes the United States a fierce global competitor. The United States must establish innovation friendly tax and fiscal policies in concert with reducing regulatory burdens and costs. The United States can empower business to take the lead in global innovation and effectively tackle major societal challenges by reducing investment risks, protecting intellectual property, ensuring cyber resiliency, investing in infrastructure, establishing a supportive policy and regulatory framework, optimizing for pro-growth fiscal policy, promoting research and development, and encouraging entrepreneurial activity through targeted incentives.
There are three key Pillar 2 topics of competitiveness, under which we have identified ten specific recommendations. The three topics include:
According to the Congressional Budget Office (CBO), the federal budget deficit in FY 2024 was $1.9 trillion or 7.0 percent of U.S. GDP. CBO projects that, by 2027, revenues will increase faster than outlays, dropping the federal deficit to 5.5 percent of GDP. Thereafter, however, outlays are projected to increase faster than revenues. By 2034, the federal budget deficit is expected to equal 6.9 percent of GDP—significantly more than the 3.7 percent that deficits have averaged over the past 50 years.
Deficits must be cut. But, at the same time, increased investment in federal research and development, technology initiatives, and 21st century science and technology infrastructure are needed to keep pace with technological change, secure future U.S. global economic and military leadership, expand the footprint of U.S. innovation ecosystems to places and people that currently do not benefit from the U.S. innovation system, and counterbalance the actions of China to seize global leadership via overmatch in the key technologies of the future, eroding U.S. economic and military superiority.
However, new studies from economists suggest that scaling AI could result in substantial output and productivity gains, which would translate into pathways for U.S. deficit reduction. For example, one study estimated that output could nearly double after 20 years from an AI-enabled productivity growth rate 44 percent higher than baseline projections of the U.S. Congressional Budget Office. Goldman Sachs Research economists estimate that AI could increase U.S. GDP by 0.4 percentage points by 2034, and increase U.S. productivity growth by 1.5 percentage points annually with widespread deployment over a decade
As a part of this dual initiative, America’s technonolgical advacments should be embraced in the wider effort to cut the deficit. Steps should be taken to encourage and accelerate the scaling and deployment of AI to capture more quickly economic growth and productivity gains that will offer opportunities to reduce the U.S. budget deficit.
The U.S. financial ecosystem has given the United States a significant global competitive and technological edge. For example, the United States invests more in R&D than any nation, with that investment dominated by the private sector. The United States accounts for a 52 percent share of global venture capital funds raised compared to China’s 40 percent and the EU’s 5 percent. The United States has uniform tax policies that benefit R&D.
To maintain its status as the world’s leading technology superpower, the United States must retain the robustness and fidelity of its financial and investment incentives proven to drive technology development, deployment at scale, new business formation, and establishment of state-of-the-art production facilities.
While the U.S. economy has continued to grow and become more technology-intensive, federal government investment in R&D as a percent of GDP has been on a steady decline for more than 50 years, from a 1964 high of 1.86 percent of GDP—during a period of great challenge, and U.S. scientific and technological ambition—to 0.62 percent of GDP in 2022. Today, the United States faces threats, competitive challenges, and opportunities equal to or greater than those experienced in the 1960s, and the world is confronted with grand challenges in health, adequate food, clean water, natural resource consumption, and sustainable energy that, left unaddressed, could cause severe environmental degradation and undermine geopolitical stability. Increased federal R&D investment could be used strategically to help the United States leverage private R&D for broad economic gains, advance federal mission capabilities, and support research and technology for the public good.
This includes funding, for example, to bolster world-class science at the Department of Energy and its advancement of clean energy technology; support for advancing critical technologies and advanced manufacturing at the National Institute of Standards and Technology; increasing National Science Foundation investment in research, STEM education, and AI and cyber workforce development; and funding to advance the United States in industries of the future such as the bioeconomy, quantum, and new nuclear energy.
Competitive tax policies will ensure that the nation mantains the growth necessary for our nation to prosper. Maintaining the 21 percent corporate tax rate will help ensure that U.S. companies remain cost competitive with many other nations, and that the United States remains a top location for businesses and new business formation. Furthermore the investment tax credit is crucial to encouraging a build-up of capital stock. Revitalizing manufacturing in America requires reinvestment in the machinery and capital equipment powering factories, especially for advanced manufacturing facilities.
The R&E tax credit helps spur private investment in R&D, as well as helping U.S. companies compete globally. Policymakers should expand the R&E tax credit by at least doubling current rates and allowing expenditures for global standards setting to qualify. They should also allow expensing of R&D expenditures for tax purposes, and expand the refundable R&E tax credit for pre-profit start-ups.
Establishing EZs tailored to advanced research fosters localized innovation clusters, with a focus on scaling up manufacturing innovations. Regions across the nation should prioritize “curated densification,” meaning that states choose what industries to specialize in based on the region’s economic, environmental, and cultural assets.
Eliminating double taxation would free up resources for U.S.-based multinational corporations to reinvest in domestic research and development. This is particularly critical in cutting-edge sectors like artificial intelligence, biotechnology, and quantum computing. Furthermore, by removing the tax penalty on foreign earnings, U.S. firms would remain competitive with companies from other countries that already enjoy more favorable tax structures.
Existing financial incentives are often not strong enough for private investors to move emerging technologies across the “valley of death.” An innovation bank providing low-interest patient capital would bridge this gap and crowd in further private investment at multiple stages in the technology pipeline.
Streamlined regulations would lower administrative expenses, allowing companies to allocate resources toward innovation, research, and development rather than compliance. Additionally, by reducing uncertainty associated with changing or complex regulations, businesses can make long-term investments with greater confidence, particularly in capital-intensive industries like energy, technology, and advanced manufacturing.
Federal, state, and international laws, regulations, and policies play a major role in shaping the environment for business investment in research, technology development, and commercialization, and where businesses will carry out these activities. Governments at every level are playing an increasing role in stimulating technology development, advocating for U.S. technology interests globally, nurturing entrepreneurship, and in developing state and regional innovation ecosystems. Government officials do not always fully understand the impact of these actions, and which may inadvertently support or undercut U.S. innovation and competitiveness.
In addition, leaders and a wide range of planners and program managers in numerous domains rely on data from federal statistical agencies that have faced funding challenges, even as the economy evolves, statistical series are developed, and new data series and special data studies may be needed. For example, the Commerce Department’s Bureau of Economic Analysis—a data pioneer on the digital economy—has produced in the past few years data series on special topics such as the space economy, the marine economy, global value chains, and the economic contribution of outdoor recreation, arts, and culture to U.S. states. The data revolution and its tools, and collection and publishing of micro-data have been a boon to researchers in numerous fields, providing new insights to policymakers and decision-makers.
Studies and program initiatives—amplified with data—could help rationalize local priorities and monitor the local and regional impacts of federal, state, and local policies, and the development of metrics of success or negative consequences. The Commerce Department’s Economic Development Administration and USDA’s Rural Business Development, in partnership with State governments, could support these studies and data-driven initiatives. Federal agencies such as the Bureau of Labor Statistics and Census Bureau are instrumental in providing reliable data to inform this evidence-driven policy and economic decision-making, but funding challenges have threatened the continued reliability of their data. Policymakers should provide increased funding for these agencies in the range of $500M-$1B, and ease legal barriers preventing data sharing across agencies.
