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USPTO Fee Diversion: Taxing Innovation

November 3, 2010

Congress has been diverting 10% of USPTO revenues, which come directly from patent applicant fees, in effect creating a direct tax on innovation paid by the innovators themselves. This fee diversion tax simultaneously siphons much needed money from the patent office and at the same time creates a disincentive to innovate. To strengthen the patent system in the US and promote the progress of the useful arts, it is imperative that Congress stop taxing innovation through fee-diversion.

Fee diversion, until recently, has not received much attention among commentators, at least in the past few years. Lately however, the practice has been given more attention, both by Congress giving some money back, earlier this year, and by some commentators such as retired judge Paul Michel.

From what I understand, fee diversion started in the fall of 1990 as part of attempt to balance the federal budget. Not surprisingly, this diversion has continued to this day, either because nobody has made enough of the issue to get attention, or because of a lack of motivation for anyone to stop it, or both. Hopefully, as more people become aware of the issue, things will begin to change, and the USPTO can get back the 10% that it, and inventors, deserve.

Ending fee diversion would greatly aid the patent office, promote progress in the useful arts, and stimulate the economy. Fee diversion takes $230 million from the Patent Office. Congress adds this money to its already generous spending, while the patent office is dying on the vine. If this practice were stopped, the patent office would have substantially more funding to work with. More funding would, quite obviously, cut down the backlog, allow for updated systems and infrastructure, and allow patent applicants to genuinely get what they pay for. The result would be more valuable US patents.

In addition to being a drain on the patent office, the 10% fee-diversion tax creates a disincentive for innovation. Taxes must balance the disincentives they create (sin tax) with the importance of raising funds. In the case of USPTO fee diversion, Congress is failing miserably at this balance. Disincentivizing innovation is about the last thing that a good economy should be doing. Further, innovation is already taxed heartily through corporate, income and capital gains taxes, so Congress should not take any more.

A tax fails when it is so high that it kills the revenue stream itself. This is the case with the current USPTO fee-diversion system. The USPTO is suffering from an outrageous backlog, and cannot provide adequate services to its clients. Moreover, American innovators should not be taxed and thereby disincentivized for their innovation more than they already are. Ending fee-diversion would achieve both of these goals, stimulating innovation and the economy, and promoting patent policy.

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