The U.S. economy faces a new and formidable competitiveness challenge. Not only has the emergence of a global economy led to the creation of robust new economic competitors, but within the last decade many nations, including most of Southeast Asia and Europe, have made innovation-led economic development a centerpiece of their national economic strategies. Their aggressive use of research and development (R&D) tax incentives is just one indicator of that commitment. Unfortunately, the United States has not kept pace. While we provided the most generous tax treatment of R&D in the late 1980s among OECD nations, by 2004 we had fallen to 17th. Addressing this new competitiveness challenge will require policy makers to take a host of steps, including improving education and significantly increasing funding for research. Yet while these steps are necessary, they are not sufficient to win the competitiveness challenge. Policy needs to do more than boost the supply of innovation resources (e.g., a better trained workforce and increased basic research discoveries); it must also spur demand by companies to locate more of their innovation-based production in the United States. If the United States is to remain the world's preeminent location for technological innovation (and the high paying jobs that result), Congress will need to significantly expand the Research and Experimentation Tax Credit. To do that Congress should: - Make the R&D tax credit permanent, - Double the rate of the regular credit from 20 percent to 40 percent, - Expand the Alternative Simplified Credit, - Create a flat credit for Collaborative R&D, - Allow firms to expense in the first year expenditures on research equipment, and - Exempt the credit from the corporate Alternative Minimum Tax.