Weekly SSRN Tax Article Review And Roundup: Elkins Reviews Tax Policy And Pharmaceutical Innovation By Eyal-Cohen & Rutschman

This week, David Elkins (Netanya) reviews a recently posted work by Mirit Eyal-Cohen (Alabama) & Ana Santos Rutschman (St. Louis), Tax Policy and Pharmaceutical Innovation (2020):

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.

Here’s the rest of this week’s SSRN Tax Roundup:

• Andrew D. Appleby (Stetson), Designing the Tax Supermajority Requirement, __ Syracuse L. Rev. __ (2020) (forthcoming)
• Edward Afield (Georgia State), Moving Tax Disputes Online Without Leaving Taxpayer Rights Behind, 74 Tax Law __ (2020)Andrew D. Appleby (Stetson), Designing the Tax Supermajority Requirement, __ Syracuse L. Rev. __ (2020) (forthcoming)
• Ricardo Garcia Anton (Tilburg), Testing the Maturity of EU Corporate Tax Law: A Principle-Based Legislation in the EU Context?, 79(2) Rivista di diritto finanziario e scienza delle finanze __ (2020) (forthcoming)
• Andrés Báez (Universidad Carlos III de Madrid) & Aitor Navaro (Universidad Carlos III de Madrid), Chapter 8: Spain, in Corporate Taxation, Group Debt Funding and Base Erosion (2020)
• Yariv Brauner, Tax Treaty Negotiations: Myth and Reality (2020)
• Richard Collier (Oxford), The Value Creation Mythology, in W. Haslehner & M. Lemensch (eds.), Taxation and Value Creation, EATLP International Tax Series, vol. 19, Chapter 6 (2021) (forthcoming)
• Mark J. Cowan (Boise State), Taxing Cannabis on the Reservation, 57 Am. Bus. L.J. __ (2000) (forthcoming)
• Nicolas Duquette (USC), Founders’ Fortunes and Philanthropy: A History of the US Charitable Contribution Deduction, 93 Bus. Hist. Rev. 553 (2019)
• Lorraine Eden (Texas A&M), David and the Three Goliaths – Defending the Arm’s Length Principle, Transfer Pricing Report (Sept. 14, 2020), Tax Mgm’t Int’l J. (Oct. 2, 2020)
• Carlo Garbarino (Bocconi), The Relevance of the Procedural Framework Principles in the Direct Tax Cases of the CJEU (2020)
• Robert W. Ghee (Fayetteville State), Trump’s Taxes: An Analysis of the Allegations (2020)
• Steve R. Johnson (Florida State), Counterpoint: The Constitution is More Important than a Few Tax Dollars Squandered by Congress: Gitlitz Was Correctly Decided, 40(1) ABA Tax Times __ (2020)
• Douglas A. Kahn (Michigan) & Jeffrey H. Kahn (Florida State), Recovery for Causing Tax Overpayment – Lyeth v. Hoey and Clark Revisited, __ Tax Law. __ (forthcoming)
• Edward Lane (Dept. of Fin.) & L. Randall Way (Missouri at Kansas City), Is It Time to Eliminate Federal Corporate Income Taxes? (2020)
• Carol Liao (Peter A. Allard School of Law), Elsir U. Tawfik, Patrick Teichreb, The Global Social Enterprise Lawmaking Phenomenon: State Initiatives on Purpose, Capital, and Taxation, Windsor Yearbook of Access to Justice 86 (2019)
• Yvette Lind (Copenhagen), Designing Aviation Taxes Within the EU – Chartering Ongoing Challenges and Proposing Future Solutions, 24 Fla. Tax Rev. __ (2021) (forthcoming)
• Michael Littlewood (Auckland), Tax Avoidance: CIR v Frucor (2020)
• Raphael Müller, Christoph Spengel (Centre for European Economic Research) & Heiko Vay (Mannheim), On the Determinants and Effects of Corporate Tax Transparency: Review of an Emerging Literature (2020)
• Angelo Nikolakakis (E&Y), Peter Blessing (KPMG), Guglielmo Maisto (Catholic), Johann Hattingh (Cape Town), John Avery Jones (London School of Economics), Fowler v HMRC (UK Supreme Court): Neither Fish nor Fowler: Tax Treaty Implications of Domestic Deeming Rules, 4 Brit. Tax Rev. 537 (2020)
• Michal Radvan (Masaryk), Czech Tax Law (2020)
• Karrie Sadiq (Queensland Univ. of Technology) & Richard Krever (Western Australia), Individual Tax Residence in Australia, 99 Tax Notes Int’l 755 (2020)
• Emily A. Satterhwaite (Toronto), Tax Signaling, __ Tax L. Rev. __ (forthcoming)
• Libin Zhang (Fried Frank), Three Years of Opportunity Zones and Outlook for 2021, Daily Tax Report (2020)