American innovation doesn't pay

By Neal Orkin

The Obama administration has asked Congress to bring back a research and development tax credit for employers that expired in 2009. The idea is to give businesses a credit for spending more money on innovation.

Unfortunately, the credit didn't work before, and it's doomed to fail again. Past recipients included fast-food restaurants, movie producers, hairdressers, banks, and stockbrokers. They were able to creatively shuffle employees into newly created "R&D departments," reap huge benefits, and await a challenge from the IRS, wasting taxpayer dollars and creating more corporate wealth in the meantime.

Corporations don't invent or innovate. Creative human beings do.

Inventions, not R&D tax credits, create new jobs and industries. The vast majority of American inventions stem from the ingenuity of employees. But in America, engineers and scientists must assign their invention rights to their employers without additional compensation. Yes, some employers give employees monetary bonuses for inventions - which are usually minuscule when compared to the resulting profit - but others just give them pen sets or congratulatory dinners.

Not so in most other industrialized democracies. Germany led the world in statutorily requiring that employee inventors get a fair share of their inventions' profits. This was thanks to the influence of the sinister Albert Speer, the Nazi architect. Falling behind the Allies in technologies such as bombsights and radar, the Nazis realized that giving employees monetary incentives would stimulate innovation.

Reenacted in 1957, the German law provides an arbitrator to settle any disputes between companies and employee inventors. German inventors typically receive 2 to 7 percent of an invention's profits. Although employers may at times carp about the paperwork and red tape involved, they have learned to live with it and generally favor the resulting innovation.

Japan has a similar law, although culture and custom kept most Japanese inventors from challenging employer awards for many years. More recently, an employer was required to pay the inventor of a light-emitting diode the equivalent of $190 million - a vast difference from the initial award of $190.

Data for both Japan and Germany show a marked increase in patent applications under this system.

To compete in the 21st century, America must make engineering and science more attractive to brighter students. Many now prefer the rewards of banking and securities, which shuffle wealth around instead of creating it. Laws ensuring compensation for innovation would help.

What might happen if innovative American employees were really rewarded? The most likely results would be a more loyal technical workforce, more attractive technical professions, and a more meaningful patent system. A research and development tax credit would accomplish none of that.