US tax & finance vs. other countries

Policies impacting tax and financial institutions have a significant impact on the national capacity to develop innovations. In this vein, U.S. policy also encourages innovation through tax relief. The United States currently has the second highest corporate tax levels in the developed world. The majority of Europe has corporate taxes under 30% with an average in the mid 20s. With the increasing mobility of global operations, multinational corporations are capable of establishing themselves in the most conducive tax environment.

By maintaining one of the highest corporate tax rates in the world, the U.S.

risks losing businesses to foreign countries. By lowering corporate taxes, foreign companies may be encouraged to establish operations in the U.S., providing jobs and encouraging the development of innovation.

Policy shapers have developed tax incentives for R&D investment in the form of credits. Federal and state level R&D tax credits work to alleviate the financial strain on developing firms with cash flow difficulties.

Many technologies take years to develop, and the financial strain from government tax through the development phase can cripple an otherwise healthy business plan. Currently, 31 states have introduced R&D tax credit programs (Wilson, 2005), and the American Competitiveness Initiative has announced that the previously provisional federal R&D tax credits will be made permanent (Domestic Policy

Council, 2006). These and other efforts are serving to consolidate national initiatives to stimulate the economy through innovative development.

401K plans in the U.S., allow a worker to save for retirement and have the savings invested while deferring current income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wages

paid directly, or ―deferred,‖ into his or her 401(k) account. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above.

Many companies‘ 401(k) plans also offer the option to purchase the company‘s stock. The employee can generally re-allocate money among these

investment choices at any time. In the less common trustee-directed 401(k) plans, the employer appoints trustees who decide how the plan‘s assets will be invested.

An Individual Retirement Arrangement (or IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. There are a number of different types of IRAs, which may be either employer-provided or self-provided plans, including: Roth IRA - contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.

Traditional IRA - contributions are often tax-deductible (often simplified as

―money is deposited before tax‖ or ―contributions are made with pre-tax assets‖), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted).

Depending upon the nature of the contribution, a traditional IRA may be referred to as a ―deductible IRA‖ or a ―non-deductible IRA.‖ SEP IRA - a provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee‘s name, instead of to a pension fund account in the company‘s name.

SIMPLE IRA - a simplified employee pension plan that allows both employer and employee contributions, similar to a 401(k) plan, but with lower contribution limits and simpler (and thus less costly) administration. Although it is termed an IRA, it is treated separately. Self-Directed IRA - a self-directed IRA that permits the account holder to make investments on behalf of the retirement plan.

Average world corporate tax Japan provides tax credits for innovation that are three times as large as those of the United States and the Organization for Economic Cooperation and Development ranks the U.S. in seventeenth place with regard to R&D tax incentives. Japan provides a tax credit for small business innovation that is four times as great as that of the United States.

While the U.S. commitment to personal freedom and to innovation through the development of small firms has always been a critical aspect of American economic strategy, the applications of innovation policy have evolved considerably over the course of American history. Recognized innovation policy has, for the large part, emerged from science and technology (S&T) policy (OECD, 2006). The first generation of innovation policy was related to the linear model of ―science push,‖

focusing on funding scientific research in government laboratories and universities (Dahlstrand, 2009). Many of these initiatives, including the lunar landing and the development of the atomic bomb, have proven highly successful. Technologies and discoveries from these government programs have helped to develop a wide variety of industries and have had a significant impact on the U.S. economy. While this policy approach has had considerable success in opening the way to tremendous scientific breakthroughs, the U.S. has not always capitalized on the innovative developments from these discoveries.

Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over, or who meet other special criteria. Medicare operates as a single-payer health care system. The Social Security Act of 1965 was passed by Congress in 1965 by President Lyndon B. Johnson as amendments to Social Security legislation.

The independent demand-driven applications of technological discoveries resulting from national science push projects (including NASA) have helped to bring about a better understanding of fundamental dynamics in the innovation process with respect to economic development, shifting innovation policy towards an innovation systems perspective, influenced by ―demand pull‖ interaction between end users and product developers.

The ―innovation system‖ can be understood in a narrow as well as a broad sense (Lundvall, 1992). The narrow approach focuses on the primary source of innovation, namely institutions and establishments that develop and expand knowledge acquisitions. Equilibrium economists predominantly view the market environment from this perspective, considering the role of technology and innovation policy to be one of support in the acquisition of sufficient investment levels for institutions (Borras, Chaminade and Edquist, 2009).

The evolutionary economist takes a more broad approach, considering the underlying foundation of the society in which these institutions operate, addressing the wider socio-economic system, an area that has always been addressed through policy but only recently addressed in specific innovation contexts (Marklund, Vonortas and Wessner, 2009).

These approaches to innovation from a policy standpoint, incorporate the different variables in financial measurements found in the innovation indices. The policy standpoints on finances and government taxes play a critical role in the

governance of the United States. In recent years, economic troubles have plagued the finance sector, particularly with the increase in banking failures. Banking failures also pose a problem to many European nations due to lax regulation and bad practices.

Recently the French bank Societe General experienced a $7 billion loss due to the corrupt actions of one futures trader.

European taxes are also quite different from America. Europe is

predominantly more socialist than America in the balance of capitalism and social responsibility. Personal and private taxes in Europe are much higher for the most part than in America in some cases reaching near 50%, while, corporate taxes in Europe are lower averaging around 20%. However, there are some European countries that significantly lower taxes in both Corporate and Private taxes such as Ireland, New Zealand, Australia and Iceland.

Banking practices are still a significant problem in many Asian countries as they are in Europe and America. Policies for curbing corruption in banking are limited in Asia, particularly in China where regional banking practices largely ignore national mandates.

Corporate and Private taxes in Asia vary greatly. Korea enjoys some of the lowest taxes with personal taxes which are particularly low at 17% while Japan has some of the highest taxes including the highest corporate tax rate of 39%. These differences in the tax and finance sectors through various nations are significant and underscore the importance of careful observation of foreign practices as foreign actions are increasingly impacting domestic operations.