Proposal and Economic Analysis
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An open source tax credit is proposed which would allow individuals who develop open source software to receive a tax credit worth 20 percent of their out-of-pocket costs. Corporations and self-employed individuals may already take a deduction for their development expenses for both open source and proprietary commercial software. The open source tax credit provides a similar incentive for individuals who currently have no means to deduct these expenses.
Subsidizing open source software development can also be justified on grounds of economic efficiency. Open source software development enhances the ability of other developers to create new products. It also enhances the development and dissemination of knowledge and ideas more broadly. Since the benefits to the broader software development community and the economy as a whole go well beyond the users of an individual software product, a policy that subsidizes open source development would increase economic efficiency.
In 2004 there were an estimated 1.2 million people who contributed to open source software in the U.S. One of the largest open source repositories, SourceForge.net, contains over 100,000 projects. Open source software is an essential part of the operation of hundreds of millions of computers around the world and has become essential to the operation of the core Internet infrastructure and for many key applications, such as the World Wide Web. Not only is open source software free to use and modify, it forms the basis of many commercial software products, e-commerce services, and many other for-profit ventures.
Despite the growing importance of open source software development, the tax code does not maintain balance between for-profit development and individual open source developers. For-profit companies can receive substantial tax benefits for costs associated with software development—both commercial software and open source software—such as the depreciation of capital equipment, expensing of other out-of-pocket costs, and may even receive a tax credit for R&D spending. Individual developers who devote their own time and resources to developing open source software, however, often receive no tax incentives for doing so.
In an effort to encourage open source development and dissemination, and to level the playing field between individual and corporate development, we are proposing a 20 percent tax credit for qualified out-of-pocket expenses for open source software developers. Such a credit would have modest costs to the federal government, yet would add significant value to the U.S. economy.
The next section describes more precisely open source software and how it may be fundamentally different from for-profit products. The sections that follow describe the particular benefits of open source development and the imbalance between tax incentives for open source development between for-profit companies and individual developers. We then analyze the potential cost and economic impact of the proposed Open Source Tax Credit.
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John Irons, Ph.D., (firstname.lastname@example.org) is Director of Tax and Budget Policy and Carl Malamud (email@example.com) is Chief Technology Officer and Senior Fellow at the Center for American Progress (http://www.AmericanProgress.org/). The authors would like to thank John Podesta and Nat Torkington for their helpful reviews of initialdrafts. Michael Powers provided research assistance.