from the Congressional Budget Office

A business’s worth includes not only its tangible assets, such as equipment, structures, land, and inventory, but also its intangible assets. In contrast to tangible assets, intangible assets have value because of attributes that have no physical substance.

For example, the value of a typical book resides in its content, not in the paper it is printed on – unlike the value of a car, which is based on physical attributes. That lack of physical substance makes the value of intangible assets more difficult to determine. The value of a book cannot be firmly established immediately after the book is written; it can be determined only through the book’s sales. By contrast, the existence of a well-developed market for cars makes it easy to place a value on any automobile without selling it.

Investing in intangible assets is also different from investing in tangible assets – in part because the time it takes to develop intangible assets is typically longer, and in part, because the investments are generally riskier.

The importance of intangible assets relative to tangible assets has grown over time. For example, the Bureau of Economic Analysis (BEA) finds that intellectual property products – which represent over two-thirds of the intangible assets covered in this report – rose as a share of business assets (excluding land and inventory) from 5 percent in 1982 to 10 percent in 2016.

In Taxing Capital Income: Effective Marginal Tax Rates Under 2014 Law and Selected Policy Options (hereafter referred to as Taxing Capital Income), CBO analyzed the tax burden on income from investments in tangible assets. In this report, CBO extends its analysis to debt- and equity-financed investments in intangible assets by corporations and other business entities and implements a new method that incorporates the effects of multiyear development periods and the risk of failure. The report contains estimates of the tax burden on income from investment by established profitable companies in five types of intangible assets:

The new method is illustrated using the permanent features of the tax law in place during 2017 (hereafter referred to as pre-2018 law). That method is also applied to an analysis of selected features of Public Law 115-97 (originally called the Tax Cuts and Jobs Act and called the 2017 tax act in this report) for equity-financed investments of businesses subject to the corporate income tax.