With so much of the world’s attention this year focused on the COVID-19 pandemic, it is little wonder that tax scholars too have waded into the breach. A quick search on SSRN turns up no less than 146 articles containing the key words “COVID” and “tax.” However, most of these articles are concerned either with the tax implications of the current pandemic or with what the government should do within the field of taxation in light of the economic havoc created by the virus and by the shutdowns and other measures instituted in an attempt to keep it at bay. This week’s article, co-authored by a tax law scholar and a public health law scholar, takes a step back and asks how the tax system can help prevent the next pandemic.
The question of how best to promote investment in high-cost, high-risk areas of science and technology has long been debated among scholars and policymakers. Without a mechanism that counterbalances heightened risk associated with R&D processes, private companies are likely to invest less than is socially optimal in risky endeavors such as invention and research because they cannot fully appropriate the benefits of the product. Pharmaceutical innovation is widely cited as the prototypical case. The traditional response to this market failure is the institution of the patent system, which provides an incentive for firms to invest in R&D by holding out the prospect of a monopoly on the use of the product of that research. However, the authors argue that for a number of reasons, patent protection is insufficient in the particular case of vaccine research. When attempting to develop a vaccine, firms have less information at their disposal that they do when developing drugs to treat already existing conditions. With regard to vaccines, firms often cannot count on repeat customers. And perhaps most importantly, those who choose not to be inoculated may receive substantial protection from the fact that others do. Because of this free-riding, the market demand for the inoculation will not reflect its true social benefit. Thus, while from a societal perspective, vaccines are one of the most cost-effective means of preventing disease and lessening its impact, the patent system is an ineffective means of stimulating an appropriate level of investment in vaccines.
The authors then describe the current tax incentive for scientific research – the Immediate Expensing for Research and Development Experimentation Credit, the Basic Research Credit, the Orphan Drug Credit, and the Patent Donation deduction – and argue that these tax incentives may not significantly modify the nature of the industry, particularly in the context of vaccine development. One of the problems is the complexity of these programs and the costs that firms need to incur to take advantage of them. Another is that they do not provide any incentives for new corporations or for established corporations that are not generating significant revenues.
The authors therefore advocate restructuring existing credits as refundable to allow all firms to benefit from them within a short timeframe. Firms that wished to take advantage of the credits would be required to publishing information on scientific inquiries and preliminary results. To streamline the process, the government would designate a list of underfunded vaccine research, based on periodic evidence and monitoring of local occurrences, investments, and subsidies available around the world, and would leave the scientific decisions to the pharmaceutical developers. Furthermore, the authors advocate a more generous patent donation regime in order to encourage cooperation between the private and public sectors in vaccine research. Finally, they address a number of potential problems with their proposal, including abuse and gamesmanship, complexity, along with issues of political economy and public choice.
In the midst of the current pandemic, it is natural to focus upon immediate and short term needs. However, it is equally important to pursue means of preventing a repeat of similar phenomena in the future. This article is an important step in that direction. One may only hope that it will stimulate a meaningful and productive discussion among members of the health and tax communities.