February 28, 2023
The New York Times had a piece reporting on the conditions the Biden administration intends to impose on companies that benefit from the subsidies in the CHIPS Act, which is intended to increase domestic production of advanced semiconductors and related technologies. It noted that one of the conditions is a tax on excess profits, defined as profits in excess of some target specified by the companies getting the subsidies.
This proposed tax seems a recipe for endless legal wrangling. Companies constantly restructure, creating, eliminating, or selling subsidiaries. It will likely be extremely difficult to show that a company actually earned more than they were supposed to from a specific subsidy. In any case, we know this route will create lots of high-paying jobs for tax lawyers and accountants, which is a complete waste from the standpoint of economic efficiency.
A more productive route would be to change the terms of the intellectual property that these companies will be getting due to the subsidies. As it is now, patent monopolies extend for 20 years from the date of issuance.
A condition of getting the subsidy could be that the length of the patent is substantially shorter, say four years. This should give companies plenty of time to take advantage of technology developed through these subsidies, especially since they would enjoy an enormous first-mover advantage that would continue even after their monopolies had expired.
This shorter period should encompass other protections, most notably non-disclosure agreements. Workers who developed the technology could not be prevented from going to competitors or starting their own company for more than four years after the subsidy was received.
While there will still be disputes about what technology was actually developed with the subsidy, this route has two major advantages. First, it provides dividends to the public through lower prices rather than tax revenue. This will mean more take-up of the product. It also should foster further innovation since competitors can quickly build on important breakthroughs rather than bottling them up in a single company.
The other advantage is that the government doesn’t have to play the role of enforcer. If the issue is the patent length that should apply, a company’s competitors are likely to press the case for themselves. If they want to use a technology or hire away key employers, they would look to move forward and force the company to go to court to try to block them.
The threat of legal action can still be an effective deterrent, but with substantial profits at stake, many companies will likely be prepared to take the risk. In any case, this is likely to be a far less bureaucratic process than determining how much a company’s profits exceeded its projected levels.