Document Type



Intellectual capital-broadly defined to include nonphysical sources of value such as patents and copyrights, computer software, organizational processes, and know-how-has a long history of being undervalued and excluded from measures of economic productivity and wealth. In recent years, however, intellectual capital has finally gained wide recognition as a central driver of economic productivity and growth. Scholars in fields such as knowledge management, financial accounting, and national accounting have produced a wealth of research that significantly advances the conceptual understanding of intellectual capital and introduces new methodologies for identifying and measuring its economic value. This article is the first to analyze and assess the taxation of intellectual capital within this broader interdisciplinary landscape. Informed by the recent research and reform efforts in these areas of management and accounting, the article finds that tax law, which allows deductions for most investments in intellectual capital, is fundamentally flawed. This results in the loss of hundreds of billions of dollars in tax revenues, costly misallocations of resources, and a grave deviation from the accurate measure of income. This article argues that, consistent with the prevailing view in other fields, investments in intellectual capital ought to be capitalized under tax law. Drawing upon the work of reform proponents in other fields, as well as that of their critics, the article considers whether and to what extent the advances in other disciplines can be adapted to the tax system. Based on that analysis, this article proposes to reform tax law to require businesses to capitalize and amortize over five years a broad array of intellectual capital investments, including research and development, advertising, worker training, and strategic planning.