Finally, policy drove R&D by making innovation investment a kind of tax haven. During the Great Depression, corporate taxes shot up and the US government imposed an undistributed-profits tax. Both policy changes discouraged companies from retaining earnings and reinvesting them. But since research expenses were a cost in accounting terms, businesses could invest their money there, untaxed. This became a way for corporations to “bank” their profits, converting today’s highly taxable gains into future profits that would, executives hoped, be realized at a lower tax rate.
