For Recession Help, an IT Innovation Tax Credit?

Venture capitalist Geoffrey Moore has no doubts about what puts the U.S. ahead of so many other lands. "The crown jewel in our economy," says Moore, author of management and innovation-themed books such as Dealing with Darwin: How Great Companies Innovate at Every Stage of Their Evolution, "is our ability to lead innovation."

It's a comforting image. But it also seems a touch out of date. Retail sales dropped 2.7% in the U.S. in December. The unemployment rate stands at 7.2%, with 3.6 million people tossed out of work in the past year. Home foreclosures jumped 81% in 2008. Clearly, President Barack Obama and his team have their work cut out to help the U.S. regain its glory.

That's why Moore, a partner at Mohr Davidow Ventures, and other Silicon Valley veterans, such as Chief Executive David Thompson and Kevin Efrusy of Accel Partners, are pushing for an IT innovation tax credit. Their open letter, dated Jan. 7, was sent to then President-elect Barack Obama, Speaker of the House Nancy Pelosi, and other Washington pols. This temporary break—proposed for two years initially, with an option to extend it for four more years should an economic recovery prove elusive—would reward companies that invest in IT. Any business spending at least 80% of its 2008 annual IT budget would qualify for the 25% credit, providing an incentive for executives to keep buying both hardware and software.

"People talk about infrastructure, but then they build a bridge to nowhere," says Thompson, who had been chief marketing officer at Web-conferencing outfit WebEx before founding, a B-to-B marketing site, in 2005. "Too often people don't take the next step to assess how [that infrastructure] actually helps you innovate, become more productive, and actually generate more revenue and get the economy going."

Maintaining Investments

Supporting investment in information technology is critical in order to raise productivity, argue Thompson and others. The tax incentive allows for some scaling back, but it would also offset the knee-jerk reaction by companies simply to retrench during the downturn. Thompson's thinking: Those who maintain their investments in IT will be primed for more aggressive growth when the economy recovers.

The catalyst for the letter came from Nobel Prize-winning economist Joseph Stiglitz, who has written extensively on the current financial crisis. In an Op Ed piece published in The New York Times in November 2008, Stiglitz wrote the benefits of such a credit would be "a high-powered, low-cost stimulus." Thompson, who describes Stiglitz as "a visionary naysayer," says the wisdom of the suggestion inspired him to take action, despite no experience of working in Washington.

That could prove a problem. Despite reassuring murmurs from Pelosi—the Democrat represents San Mateo, Calif., where is based—the proposal hasn't yet captured the attention of lawmakers, and while Obama's team has earmarked $37 billion of the $825 billion stimulus plan for spending in high-tech areas, the tax break is absent from current versions of economic stimulus packages.

The Silicon Valley petitioners might also be accused of pushing breaks to line their own pockets. Most of the signatories are heavily involved in the technology industry. If companies are incentivized to invest in computer hardware and software, who would be the beneficiaries? Firms that produce these tech tools, of course.

Wealth Creation?

Thompson and others spiritedly argue that their own vested interest is beside the point. "One of the innovation alternatives executives have is to buy software, equipment, or next generation technology, and that's going to be the path to the medium- to long-term solution," says Moore. "This is not a job-creation idea; it's an innovation wealth-creation idea."

Similarly, Christopher Cabrera of Xactly, a San Jose outfit that markets software to automate sales compensation, noted in a blog post: "It's not about feathering the nest of technology providers. It's about ensuring that technology-using companies maintain their competitive edge, increase their productivity, and emerge from this downturn in a strong position globally."

But some tax experts doubt the incentive would actually do its job. "As a practical matter, I doubt it would have that much impact," says Dean Baker, co-director of the Center for Economic & Policy Research in Washington. "Mostly what you'd do is pay them for what they're already doing. And that's probably not the most effective way to stimulate innovation."

So what would be more effective? And what role should the government play in promoting innovation? It may be that business needs to step up on its own—for its own good.

Attitude Adjustment Necessary

"We have to ask not just what the government can do for us, but what we can do for the government," says John Seely Brown, a technologist and co-chairman of the Center for Edge Innovation at management consultants Deloitte. "We're so good at designing and innovating new products, new technologies, and new processes, but the real challenge now is to design a new kind of institution." (See also Shoshanna Zuboff's call for an "institutional bypass" of the health-care system.) That, he adds, requires no less than a change of mindset on the part of both individuals and corporations. And an attitude change, of course, is impossible to legislate.

In practical terms, this means a move away from government handouts, subsidies, and even credits. "Massive bailouts don't cause you to look at the world differently," argues Seely Brown, pointing to General Motors (GM) as a company that's historically proven unwilling or unable to embrace the practice of innovation. "The world is changing so fast that you have to figure out how to create a context to constantly bootstrap your own capabilities, with a management structure that honors that and embraces change."

Despite the severity of the recession and the likelihood that things will get even worse, some see a glimmer of hope. "There's a big innovation opportunity here to change the fabric of how business is done and the fabric of consumer life," notes Moore. "The point of the tax credit is to reengage the business-to-business economy in wealth generation mode, by increasing the competitiveness of offers and value so they can counteract the deflationary effect of the downturn. This allows businesses at the margin to take the innovation risk."

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