Keep US Economy Booming by Bolstering Intellectual Property

Ross Marchand

February 15, 2019

Too often, lawmakers drum up discussion about “innovation” just to talk about their favorite pet projects to be paid for by taxpayers. Yet, any actions taken are more likely to include wasteful taxpayer subsidies rather than reforms that would actually bring about change. In particular, members of Congress seldom mention how important Intellectual Property (IP) rights are to fueling innovations that benefit customers and taxpayers. But thanks to the U.S. Chamber of Commerce’s 2019 International IP Index, IP is finally getting the credit it deserves for growth and prosperity.

The United States continues to stand above all other nations in protecting IP, garnering the top overall property protection score. This stellar ranking, unchanged from last year, masked important improvements that the US has made in individual IP categories. In the area of patent protection, the US went from twelfth place last year to (tied for) second place this year, due to an array of reforms announced by the US Patent and Trademark Office (USPTO). Most importantly, the USPTO tightened the claim construction standard, making it more difficult for parties to invalidate patents without due process.  Even though these changes are mostly unknown to the majority of the American public, they are critical to the growth of the US economy.

As the report conclusively demonstrates, IP protection scores are strongly correlated with higher levels of investment and research. Countries totaling above the median IP aggregate score are 30 percent more likely to attract venture capital and private equity funds and 53 percent more likely to attract greater private investment in R&D. Other studies point to IP protection as the driver of capital flows and not the other way around.  Increased capital flow also benefits taxpayers as tax revenue increases without lawmakers having to raise taxes.

Researchers from Iowa State University, Washington University, and the Swedish House of Finance found that, of various government measures to foster innovation, only patent protection and basic financial market rules seem to do the trick. These measures are found to be superior to “traditional tax subsides at promoting the innovative investments that drive economic growth.” Additionally, prominent British biochemist Terence Kealey notes that there is little correlation between levels of public R&D investment and economic growth. Despite all the criticism of IP enforcement, property rights cannot be effectively replaced by government intervention.

Nor can the issue of intellectual property protection be placed in a vacuum. Since IP is such a large driver of growth, the US government derives a hefty share of annual tax revenue from enforcing IP protections. While direct estimates are few and far between, the USPTO keeps estimates of employment and wages in IP-intensive industries. Assuming the latest (2014) estimate of 27.9 million direct jobs and a median yearly wage of IP-intensive workers ($68,000), the federal government pulls in more than $72 billion in income taxes each year due to IP enforcement. And since corporations derive $115 billion a year in IP-specific licensing revenue, resulting corporate tax revenues amount to $30 billion each year.

Intellectual property is a windfall for the US, adding more than  $100 billion to federal coffers each year. Given such a large figure, even slight cracks in enforcement can cost taxpayers dearly. U.S. businesses lose around 10 percent of revenue to online counterfeit sales, resulting in billions of dollars in foregone tax revenue each year.

There are some simple ways the U.S.’s position as the standard-setter of intellectual property can be strengthened. For starters, Congress should take the fight to suspicious foreign websites promising Americans shady generic versions of drugs produced by domestic pharmaceutical companies. While these “online pharmacies” seem to do Americans a favor by allowing inexpensive access to pricy medications, customers are in fact hit with a double whammy. The claims that these drugs are in fact generic versions of popular drugs are questionable; many Americans have been hospitalized due to contaminated foreign brands.

Additionally, pharmaceuticals such as Pfizer and Merck have a diminished incentive to market new medications when their products will easily be imitated by foreign knock-offs. Increasing market shares attained by online pharmacies can and will reduce the rate of new, life-saving drugs released to the public.

Other necessary reforms will have to address the root causes of IP theft and will have more gradual effects. Regulatory barriers to entry increase the price of everything from new drugs to new movies, and encourage customers to find illicit ways of getting what they want. Streamlining the drug approval process and reducing penalties on small movie theaters and streaming services can level the playing field and encourage lawful innovation. Enforcement and regulatory reform pack a powerful one-two punch, and keep the US churning its inventive spirit.

Politicians alone cannot claim responsibility for innovation, but they certainly have the power to give industries the right tools for growth.