U.S. Tax Reform Can Fuel AI and Cybersecurity Innovation

In the rapidly evolving technology landscape and amid a proliferation of developments in artificial intelligence (AI), cybersecurity threats and data breaches are equally on the rise. Both AI and cybersecurity have quickly emerged as important areas for innovation and investment. AI enhances cybersecurity by enabling faster, more accurate threat detection and response, while cybersecurity protects AI systems and our increasingly interconnected world. As a result of this dynamic, countries and companies are doing all they can to lead in these fields.

However, the growth and development of AI and cybersecurity are closely tied to the economic environment and public policies that can foster (or hinder) responsible progress as well as a country's competitiveness and technological leadership. In the United States, many beneficial provisions of the 2017 Tax Cuts and Jobs Act are expiring or shrinking at the end of 2025. As the U.S. Congress thinks about the parameters of a 2025 tax package, several areas could significantly shape innovation in AI and cybersecurity and serve as a catalyst for beneficial technology breakthroughs.

Encouraging R&D Investment

At Cisco, our talented employees across the world drive our research and development (R&D), and we spend more than $8 billion annually to fuel that innovation-with most of those efforts occurring in the U.S.

One of the most direct ways U.S. tax reform can drive innovation is by restoring the full tax deduction for U.S. R&D investments made each year. In the past, R&D costs could be deducted in the year incurred. However, that tax provision has since changed. Today, U.S. R&D investments made each year must be capitalized and deducted ratably over the next five years-a departure from 70 years of bipartisan, pro-innovation tax policy that permitted the immediate deductibility of R&D costs. This means the U.S. is now one of only two developed countries that don't allow an immediate tax deduction for R&D costs incurred. This change has led to a hefty tax hike that disincentivizes U.S. innovation and makes it harder for American companies to compete on the world stage.

The U.S. has historically prided itself on its climate for innovation and should want companies to expand their R&D in the U.S. Congress should restore the immediate R&D tax deduction to bolster U.S. innovation and increase domestic investment-including in AI and cybersecurity.

Recognizing the Value of Intellectual Property

One of the most powerful provisions in the 2017 tax legislation was the Foreign-Derived Intangible Income (FDII) provision. By offering a lower effective tax rate, FDII encourages U.S. companies to own, develop, and make full use of intangible assets-such as patents, trademarks, and other intellectual property (IP)-domestically rather than abroad. It also promotes the repatriation of foreign IP to the U.S.-including IP related to AI and cybersecurity. As a result of FDII, U.S. companies have a competitive tax rate and generate a greater share of their global profit in the U.S.-resulting in additional taxes paid to the U.S.

It will be important for lawmakers to retain FDII at its current rate in any 2025 tax reform package, so the U.S. does not backpedal on the progress made in increasing U.S. exports, competitiveness, and innovation.

Maintaining the Current Corporate Tax Rate

Prior to the 2017 tax reform, the U.S. corporate rate was one of the highest among developed countries-a policy that hindered domestic innovation and investment. Since the U.S. set the corporate tax rate to 21%, there has been a 20% increase in domestic business investment-through workers, equipment, patents, and technology-for the average company.

Keeping the current corporate rate in place will provide businesses with the certainty they need to plan for long-term investments in R&D, technology, and employees-all of which are driving the latest breakthroughs in AI and cybersecurity, among other areas.

Remaining at the forefront of innovation

Global competitiveness has created a constant need to innovate and create the solutions that will solve our most complex challenges. This positive pressure fuels investment in R&D, accelerates the adoption of secure technology, and encourages knowledge sharing across borders-further contributing to a thriving, more inclusive, and connected global economy.

At Cisco alone, we are innovating every day. We recently unveiled Cisco Hypershield-the first AI-native security architecture that helps customers protect against known and unknown attacks-and launched a $1 billion global investment fund to bolster the startup ecosystem and expand and develop secure, reliable, and trustworthy AI solutions. As we enter this new technological era of AI and cybersecurity, we are also prioritizing digital skills training through our Cisco Networking Academy program and working to address AI's impact on the tech workforce through the AI-Enabled ICT Workforce Consortium. These are just several of the many ways in which Cisco is powering and protecting the responsible AI revolution.

Every country wants to remain at the forefront of innovation, and the U.S. has been a preeminent leader in technology. However, to maintain and extend that leadership amid an increasingly competitive map, U.S. policymakers must advance a tax code that boosts R&D, strengthens the economy, keeps American businesses competitive, and enables innovations in AI, cybersecurity, and other emerging technologies that will benefit society.

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