Don’t Tax iPhones, Disney Movies, or Cancer Drugs for the Federal Research that Enabled Them (WSJ op-ed)

At a recent hearing on drug prices, Rep. Alexandria Ocasio-Cortez said that by funding federal research agencies such as the National Institutes of Health, “the public is acting as an early investor, putting tons of money in the development of drugs that then become privatized.” The American people, she complained, receive “no return on the investment that they have made.” The witness she was addressing, Harvard Medical School professor Aaron Kesselheim, confirmed the absence of “licensing deals that bring money back into the coffers of the NIH.”

Direct licensing deals between companies and government labs are rare by design—a design that has fueled American economic, military and political power for the past seven decades. This structure has been a critical engine of U.S. economic growth since the end of World War II.

The American electronics, personal-computer and biotech industries all can trace their origin to federal research. The discovery of the transistor, for example, was enabled by federal research into the band theory of solids and the science of growing pure germanium crystals. The internet, the Global Positioning System, genetic engineering, pacemakers, magnetic resonance imaging, 3-D animation in movies, the Google PageRank search algorithm, even the Siri voice assistant on iPhones—all sprang from federal research. Yet the government receives no royalties on Disney movies or iPhones.

Still, Ms. Ocasio-Cortez is wrong that taxpayers get no return on their investment. The resulting growth from these inventions generates significant government revenue in the form of income and capital-gains taxes on thousands of companies and their millions of employees. Leading the world in science and technology, as well as their commercial applications, also enhances America’s geopolitical power and strengthens national security.

The goal of the federal research system has always been to transfer new knowledge and laboratory results as quickly and seamlessly as possible to private industry, which can then translate them into useful products that can boost the economy. The NIH, for example, spends $3.9 billion annually on research conducted in national labs. Biotech and pharma companies spend more than $90 billion annually on drug discovery and development.

This system took shape toward the end of World War II. Vannevar Bush, President Franklin Roosevelt’s chief scientific adviser, had mobilized the nation’s scientists in support of the war effort. FDR wrote that there was no reason that the same system “cannot be profitably employed in times of peace.”

Roosevelt and Bush understood that free markets work well for encouraging innovation, except where they fail: long-term basic research. The return on that investment is often negative. No one company could have afforded to invest in growing pure germanium crystals without knowing if there would be any benefit. No one company could have afforded to invest in the speculative science of genetic engineering decades ago. FDR and Bush solved a game-theory problem: When an investment isn’t good for any individual company on its own but could benefit the economy as a whole, the federal government should fund it.

Quantifying the “return” of that taxpayer investment, and separating the contribution of private vs. public investment, is a famously difficult problem in science policy. But as one measure, economists have attributed roughly half of the trillions of dollars in U.S. gross domestic product growth since the end of World War II to technology improvements. Other countries, most notably China, have noticed the model’s success and adopted it. To remain the world’s leading power, the U.S. needs to invest more in federal research and to transfer its findings seamlessly to industry. Additional taxes on innovation would be a hindrance.

A lack of licensing deals between companies and national labs has nothing to do with high drug prices, which reflect the enormous development costs—in cancer studies, for example, more than 95% of drug candidates never make it past testing. Many smart people are trying to figure out how to develop effective treatments while keeping prices low. Some of their ideas were reviewed during last week’s hearing. None, however, involve creating more friction between federal research and private industry.

Taxing iPhones, Disney movies or cancer drugs for the federal research that enabled them won’t do anyone any good.

This op-ed originally appeared in the Wall Street Journal print edition.