direct R&D spending on areas where private firms are not as active. One difficulty with direct government

support of R&D is that it inevitably involves political decisions about which projects are worthy. The scientific

question of whether research is worthwhile can easily become entangled with considerations like the location

of the congressional district in which the research funding is spent.

Policy #2: Tax Breaks for Research and Development

A complementary approach to supporting R&D that does not involve the government’s close scrutiny of

specific projects is to give firms a reduction in taxes depending on how much research and development they

do. The federal government refers to this policy as the research and experimentation (R&E) tax credit.

According to the Treasury Department: “. . . the R&E Credit is also a cost-effective policy for stimulating

additional private sector investment. Most recent studies find that each dollar of foregone tax revenue through
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