I am certainly open to the possibility that there are better ways of incentivizing R&D, and that the tax credit isn't a very good way of doing so.
What alternatives do you favor?
I’m still trying to get more comfortable with the premises for the need to incentive R&D first, and also the particular transactional costs (in the economics sense of the word) that might be reducing the efficiency of the markets as they relate to R&D activities.
In particular, I grant the spillover effect - the R&D produced by Firm A not only provides a benefit to Firm A, it also provides a benefit to Firm B even though Firm B had nothing to do with the R&D - and the argument that Firm A thus does not capture all of the benefit produced by its R&D efforts; however, I am not fully sold on the view that this effect is somehow qualitatively different for R&D than it is for any other good.
For example, it seems to me that there is a spillover effect from all manner of other activities, wherein the firm undertaking the activity - paying for it - does not capture all of the benefits accruing from that activity.
Take auto mechanics, for example. Suppose that I’m an auto mechanic who works on sedans. The more sedans the auto manufacturers make, the better off I am, not the least because, with the greater demand for my services occasioned by the greater number of sedans around, I can increase my per-unit price and still sell as many hours of labor as I did before. And all of that may take place even as the per-unit cost of each sedan is dropping because the marginal costs of production are dropping.
Now, I’m happy to be corrected, but it seems to me that the benefit accruing to me from the auto-building activities of the auto manufacturers constitute a benefit arising from those activities that the auto manufacturers are not capturing.
On that view of things, since there are similar spillover effects in all walks of life, the argument that firms cannot capture all of the benefits occasioned by their R&D activities does not really justify an R&D-specific incentive such as a tax credit.