Restoring the American Arsenal: The Case for a Defense-Critical Patent Box in the United States - American Affairs Journal
Predominantly civilian companies with existing or new defense production, new defense startups, and traditional defense contractors could all benefit from the creation of a defense-critical patent box while improving U. S. military innovation and diversifying the national defense industrial base. The adoption of a patent box system limited to defense-critical industries and supply chains would align with the encouragement by the Pentagon of the commercialization of IP resulting from innovative R&D.
The dependence of the U. S. military on other countries, including adversaries like China, for critical supply chains, combined with the rapid depletion of U. S. weapons in Ukraine and Iran, has engendered the belated and bipartisan recognition of the inadequacy of America’s post-Cold War industrial base. To promote military-industrial surge capacity during wars both large and small, and to make the defense-industrial base as technologically innovative as the U. S. commercial sector, the U. S. government is seeking to encourage defense startups and civilian manufacturing companies to do more to boost defense production. The use of a patent box, a tax incentive that imposes a lower tax rate on corporate profits earned from patented intellectual property assets, can contribute to the goal of expanding a dynamic defense industrial base. Hollow StrategyDuring the Cold War, U. S. military strategy implicitly or explicitly was based on the idea of “the escalation ladder”: the threat (or actual use) of increasingly destructive military power to force an opponent to negotiate. Drawing on game theory, neoclassical economics, and other highly mathematical academic disciplines remote from the real world of power politics, analysts like those of the RAND Corporation replaced common sense with pseudoscience, as this excerpt from a 1984 RAND report for the U. S. government demonstrates:”This study describes a conceptual decision model for treating escalation processes in the automated war gaming of the RAND Strategy Assessment Center . . . . The study’s purpose is to provide a logical structure for writing decision rules, a structure that would assure some level of coherence and completeness while encouraging rule writers to consider specific issues . . . . ”1Herman Kahn, the most famous RAND analyst, provided thereductio ad absurdumof this approach to strategy with an escalation ladder that had forty-four rungs. 2As I have argued in this journal, the Cold War-vintage escalation ladder was a variant of a grand strategy based on air power, adopted by successive U. S administrations from the late 1940s, mainly because it was less expensive and relied less on government industrial policy than the historic American “arsenal system” in which government-owned military factories were supplemented by the conversion and creation of civilian manufacturing facilities during wartime. 3The highest rung of the escalation ladder was, and remains, the use of nuclear weapons delivered by air against the enemy, either selectively or indiscriminately. It was hoped that, confronted with the threat of massive nuclear bombardment of its territory, the Soviet Union or other enemies would capitulate to the United States and its allies, ending the conflict on American terms. Among the many flaws in the strategy of the escalation ladder was the fact that during the Cold War, the two superpowers limited their military conflict to proxy wars in third countries including Korea, Vietnam, and Afghanistan. In these conflicts, the stakes were not high enough for each opposing power to risk destruction of its own homeland. At the same time, each great-power sponsor of local proxies considered the prolongation of the proxy war to be preferable to the defeat of its own proxies and the loss of local and global credibility that might result. Instead of the direct and limited conflicts for which the escalation ladder was designed, the United States as well as the Soviet Union found themselves supplying and funding limited, local wars of attrition in which the use of nuclear weapons or direct conventional assaults against the opposing superpower was never seriously considered. Instead of an ever-growing arsenal of expensive and potent weapons of mass destruction that would never be used, what was needed was the ability to quickly replenish munitions for U. S. forces and allies in limited wars and counterinsurgency campaigns. Cold War 2. 0 and its DemandsToday’s second Cold War arguably began in 2008 with the Russo-Georgian War, or alternately, in 2014 with Russia’s annexation of Crimea and its paramilitary intervention in Ukraine; its full-scale invasion of Ukraine in 2022 was the definitive starting gun. As in Cold War I, there are two major blocs: the U. S. -led bloc, including its traditional East Asian, European, and Middle Eastern allies old and new, and a rival bloc in which Russia and Iran are enabled by the economic and indirect military support of China. As in Cold War I, many countries seek to be nonaligned, in the hope of extracting favors from both great-power alliances. And in Cold War II, as in Cold War I, instead of direct assaults on one another or their major partners, the U. S. and China and their allies compete by means of arms races, economic warfare, and regional proxy wars. The most important proxy war in Cold War II has been the war in Ukraine. By allowing Israeli Prime Minister Benyamin Netanyahu to persuade him that a war of decapitation of Iran’s leaders would be brief and inexpensive, President Donald Trump plunged the United States into a second extended proxy conflict in Iran, backed indirectly by China and Russia. Like the proxy wars in Korea, Indochina, and Afghanistan in Cold War I, today’s proxy wars in Eastern Europe and the Persian Gulf with the Sino-Russian-Iranian-North Korean bloc are limited to lower rungs on the escalation hierarchy but consume substantial quantities of munitions and other military aid from the external great power sponsors. According to the Center for Strategic and International Studies (CSIS), during Operation Epic Fury in Iran alone, the United States has depleted half of itsthaad(Terminal High Altitude Area Defense) interceptors, nearly half of its Patriot PAC-3 stockpile, 45 percent of its precision strike missile stockpile, a third of its Tomahawk cruise missiles, more than a fifth of its long-rangejassms (Joint Air-to-Surface Standoff Missiles), and around ten percent of SM-6 (Standard Missile 6) missiles. According to the Royal United Service Institute (RUSI), in the first sixteen days of the Israeli-American war against Iran, the U. S. used nearly half of itsatacms and Precision Strike Missiles, 40 percent of itsthaadinterceptors, and a fifth of its supply of Tomahawks. 4Together, the Iran War and the Ukraine War have depleted the American stock of weapons that were intended to deter China in Asia. For instance, the United States has been forced to remove air defense systems from South Korea to the Middle East. 5In a report on its Rebuild the Arsenal Initiative, the innovative defense contractor Anduril observes how outdated practices weigh down America’s defense-industrial capacities:Government has long assumed that more exquisite materials, components, and manufacturing processes are the only way to meet the military’s unique requirements for durability, security, andeffectiveness—eventhough it makes those products significantly more expensive and less producible. Legacy defense industry also prefers exquisite, hard-to-produce products for different reasons: They reduce competition by raising the barrier to entry, and the increased costs to manufacture these more exquisite products simply get charged to the government on cost-plus contracts. Government then makes all of these problems worse through slow, onerous verification, certification, and testing burdens. 6The result has been the bifurcation of U. S. industry into a distinct, specialized defense industrial base and a commercial, civilian manufacturing base which has been decimated by offshoring to other countries, including China, the major military rival of the United States. As Anduril notes, the kind of conversion of civilian manufacturing to defense production that contributed to the victory of the United States and its allies in the world wars is no longer possibledue to manufacturing methods no longer being scalable: “ During World War II, the Ford assembly lines at Willow Run could be repurposed to produce B-24 bombers because those aircraft were more similar than dissimilar to commercial products. The Ford plant in Detroit today could never produce the B-21 bomber or other advanced military platforms and weapons. ”Rebuilding the depleted U. S. arsenal will take years. To make matters worse, since 1989, the Defense Department has required defense contractors to focus on missiles for a brief air war strategy rather than the kind of munitions, including artillery shells, that are useful in protracted, limited wars of attrition like in Ukraine. National security experts of both parties have come to recognize that rebuilding the American military arsenal will require not merely more funding but also a fundamental restructuring of the post-1989 defense-industrial base (DIB), in which a small oligopoly of defense contractors specialized in “exquisite” weapons systems. In its 2025 report,Acquisition Transformation Strategy: Rebuilding the Arsenal of Freedom, the Department of War describes the adverse effect of hyperconcentration among contractors:The DIB has been consolidated from 51 prime vendors following the Cold War down to just five major prime contractors developing our most critical weapon systems today. The DIB is stagnant, building the world’s best and most exquisite weapon systems at low volume while relying on obsolescent parts, outdated manufacturing processes, and stale innovation. In contrast, the commercial industry outpaces the DIB in advancing cutting edge technology across multiple product domains while gaining cost efficiencies from increased volume and productivity gains with each successive generation. 7To expand and modernize the U. S. defense industrial base, the Pentagon calls for a number of reforms, including incentivizing more companies to build military equipment. One innovative method that could be added to these programs for persuading more civilian companies to join the defense industrial base, or to maintain and expand their existing defense production lines, would be the creation of “patent boxes” for defense-critical, dual-use manufacturing in the United States, or in some cases, in the territory of American allies. Remobilizing the DIB through Patent BoxesSome predominantly civilian companies already supply defense-critical products to the U. S. government. One way to enlarge our defense-industrial base is to encourage the creation of new defense companies, like Brasa Defence Systems (Adjustable Tactical Equipment), Icarus Swarms (Autonomous Drone Swarms), ARX Robotics (Autonomous Unmanned Systems), and Hawking (Anti-Drone Systems). 8A complementary method is to incentivize companies to expand into the production of military goods and services. According to theWall Street Journal, the Trump administration has asked GM and Ford to help in ramping up defense-related production. Administration officials “asked executives to identify barriers to taking on additional defense work, from contracting requirements to hurdles in the bidding process. ”9Already, a surprising number of companies known for civilian products have sidelines as producers of military hardware. For example, Deere & Co. , whose symbol is the iconic John Deere tractor, produces both manned and robotic utility vehicles for the military. 10Dell, FedEx, and General Electric are also among the familiar brands that do business with the military. 11National governments can incentivize private corporate innovation via the tax code with two kinds of incentives, based on the costs of R&D or the profits from R&D. Incentives based on costs reduce taxes on expenses spent on investing in innovation, while incentives based on outputs reduce taxes on profits that result from innovation-produced intellectual property (IP) assets. The most common cost-based incentives that reward corporate innovation are R&D tax credits and super deductions. An R&D tax credit allows a company to lower its tax liability by engaging in qualified research and development. A super-deduction is a tax deduction that allows a corporation to deduct more than 100 percent of its eligible expenses from its taxable income. 12An example of a profit-based tax incentive is a patent box, sometimes called an innovation box, that allows a company to benefit from a lower rate of corporate income taxation on income that derives from qualifying intellectual property (IP). Depending on the jurisdiction, the IP assets that are eligible for reduced tax rates under a patent box system can include patents and trademarks, while eligible income derived from the IP can include royalties, licensing fees, capital gains from the sale of IP, and sales of goods and services that incorporate the IP assets. Patent boxes can incentivize innovative firms to commercialize their innovations. In addition, national patent box legislation can promote the localization of production by discouraging offshoring by multinational firms that seek to take advantage of opportunities for tax arbitrage; it can do this by means of “nexus” requirements which require the activities eligible for the lower tax rate to be undertaken by the company itself, rather than affiliates set up to exploit foreign tax loopholes. Both of these goals are important to the productive national economy in general, but their importance is magnified in the case of firms which are, or can be, part of the national defense-industrial base. By incentivizing commercialization, a patent box system complements rather than competes with other subsidies for innovation or targeted production such as an R&D tax credit or a super-deduction. The R&D tax credit, for example, lowers the cost of research and development activities, but these are only likely to be undertaken by firms that are already in the relevant line of business or plan to expand into it. Whether such expansion would be profitable or not can be affected by patent boxes which lower taxes on relevant profits from commercializing IP. A study by University of Oxford researchers concludes that “on average a patent box is linked to greater success rates” in patenting innovations. 13The advantages of patent boxes have led many industrial nations to adopt them in the last few decades. In 2025, thirteen of the twenty-seven members of the European Union had patent box regimes, with reduced taxes on eligible profits from IP assets ranging in that year from 14. 45 percent in France (in contrast to the general corporate tax rate of 36. 13 percent in France) to 1. 75 percent in Malta (in contrast to the general corporate tax rate of 35 percent in Malta). Several European countries that do not belong to the EU, including the United Kingdom and Switzerland, have patent box laws as well. 14Many of these countries, in addition to having patent boxes, also have R&D tax credits and super-deductions. China has a super-deduction of 200 percent for qualified companies. 15The United States is an outlier among advanced industrial countries in lacking patent box tax incentives either for private corporate R&D in general or for specific purposes. The American tax code subsidizes corporate R&D through several programs, including the R&D tax credit for qualified research expenses and the payroll tax offset for qualified small businesses, along with immediate expensing for domestic R&D expenses in the same year and the ability to capitalize and amortize foreign R&D expenses over fifteen years. 16But the U. S. has neither a super-deduction nor a patent box system. As a result, in subsidizing corporate R&D, the U. S. has fallen behind both major allies and major rivals. While the U. S. and other OECD countries spent comparable amounts on tax incentives for R&D in the early 2000s, today, the level of U. S. R&D tax incentives is 20 percent of the OECD average and one-tenth of that of China. 17Proposals for patent box policies in the United States date back to 2007, when the U. S. Treasury noted that American multinationals had incentives to develop production based on a patent in foreign countries which used patent box rules to lower taxes on the royalties paid to the U. S. parent firm. Instead of proposing that the U. S. fight fire with fire by adopting a patent box system (similar to that of its commercial rivals), however, the Treasury, true to neoliberal distrust of industrial policy, suggested that the United States simply lower its corporate income tax rate overall. 18In 2012 and again in 2013, the Manufacturing Innovation in America Act, sponsored by Representative Allyson Y. Schwartz (D-Pensylvania), sought to amend the U. S. tax code to permit a deduction of 71 percent for eligible IP patent box profits. 19In 2015, Senators Rob Portman (R-Ohio) and Chuck Schumer (D-New York) similarly proposed that corporate profits derived from IP assets like patents and trademarks be taxed at lower rates than other corporate profits. 20These patent box proposals failed in Congress in part because of opposition from both ends of the political spectrum. On the left, progressive advocacy groups denounced them as corporate welfare; on the right, conservative opponents of industrial policy objected as they tend to view all targeted tax incentives as instances of “crony capitalism” that deviate from the abstract ideal of eliminating tax expenditures and lowering tax rates across the board. 21The progressive Roosevelt Institute criticizes patent box proposals for eroding the national tax base “by forcing states to undercut one another, prompting a ‘race to the bottom’ that again only leaves multinational corporations as winners. ”22But the global race to the bottom in corporate taxation already exists and will continue to exist in the absence of unlikely comprehensive global tax harmonization. Given this reality, a patent box policy can deter offshoring of IP in strategic national industries which would have taken place in its absence. Because of tax confidentiality policies and trade secret protection, many governments refuse to disclose the names of individual companies that use patent box laws to the public. For this reason, information linking specific patented technological innovations to patent box tax law applications by individual companies is difficult if not impossible for outsiders to obtain, And corporations generally do not publicize the way they use their patented innovations against their rivals. Trade secrets are particularly important in R&D-intensive industries in which patents are critical in incentivizing and protecting innovations. Available data does, however, give a sense of the industries in which companies are most likely to apply for patent box treatment in particular countries. For example, according to the British government, in the financial year 2023–2024, 1,650 companies opted for patent box tax relief, with 92 percent of the tax relief going to the top 145 companies by size of patent box claim. Around 41 percent of the patent box tax relief went to manufacturing firms, while about 14 percent of the tax relief total rewarded “professional, scientific and technical” activities in the UK. “Information and communication” was another sector that won significant patent box tax relief. 23This supports the observation of the Monthly Industry Monitor “that industries such as pharmaceuticals, biotechnology, software development, and electronics are particularly well-positioned to benefit from reduced tax rates on income derived from patented technologies,” subject to good design and implementation. 24To be sure, like any tax expenditure to promote an economic or social goal, a patent box can reduce tax revenue. But as a share of national revenue in OECD countries in 2023, corporate income taxes were only 11. 9 percent, more important than property taxes (6. 1 percent) and much less significant than consumption taxes (31. 1 percent), social insurance taxes (25. 5 percent), and individual income taxes (23. 7 percent). 25Unfortunately, the opposition to patent box legislation from the anti-capitalist Left and the libertarian right, both rooted in ideological dogmas, is likely to remain powerful as an obstacle to the adoption by the United States of patent box laws comparable to those of other nations. The imperatives of national security, however, in today’s renewed era of great power conflict might overcome political opposition if the patent box system were tailored to IP assets that are relevant to the DIB. Covering Defense Industrial BasesTo minimize the potential that corporations would vindicate the critics by gaming the system, any defense-critical patent box law in the U. S. should be carefully designed. Localization requirements should compel the firm to use national workers, facilities, or sites in creating the IP. In addition, so-called nexus requirements should mandate that the firm itself be responsible for most or all of the R&D that produced the eligible IP asset. To deter the misuse of patent boxes for profit shifting, the OECD in 2015 agreed on a “modified nexus” approach for national IP laws as part of its Base Erosion and Profit Shifting (BEPS) Action Plan. While the U. S. does not comply with BEPS, a measure sharing its goal, the Global Intangible Low-Tax Income (gilti) tax, was included in the 2017 Tax Cuts and Jobs Act. The One Big Beautiful Bill Act of 2025 renamedgiltias the “Net Controlled Foreign Corporation Tested Income Tax” and set a permanent rate of 10. 5 percent for the United States Base Erosion Anti-Abuse Act (BEAT). Resultantly, the U. S. , while preserving its sovereignty and rejecting a global minimum tax on corporations, has created a parallel system that achieves some of the same objectives as OECD initiatives against the loss of national tax revenue to profit shifting by multinationals. 26Predominantly civilian companies with existing or new defense production, new defense startups, and traditional defense contractors could all benefit from the creation of a defense-critical patent box while improving U. S. military innovation and diversifying the national defense industrial base. The adoption of a patent box system limited to defense-critical industries and supply chains would align with the encouragement by the Pentagon of the commercialization of IP resulting from innovative R&D. In the words of the 2025 Intellectual Property Guidebook for DoD Acquisition, “IP protects industry innovation and generates revenue while also serving as a linchpin for national security. ”27A new defense-critical patent box system in the U. S. might be coupled with a new patent pool system, designed to facilitate the transfer of intellectual property among participating U. S. firms while denying it to foreign countries, with the possible exception of close allies. Eligibility for the lowered tax rate for IP asset-generated profits might be conditioned on participation in the patent pool, which could be managed by the Department of War or a third party. One precedent for a combined defense-critical patent box-patent pool system could be found in the Manufacturer’s Aircraft Association, a private corporation which formed during World War I under the guidance of Assistant Secretary of the Navy Franklin D. Roosevelt. Lasting until 1977, the Manufacturer’s Aircraft Association removed impediments to wartime United States plane manufacturing by requiring companies to cross-license certain product designs without charging high royalties. Whatever the outcome of today’s Cold War II, the future of world politics, like its past, is likely to consist of cycles of conflict among a changing roster of great powers, separated by periods of unstable détente. The Latin proverbSi vis pacem, para bellum—“If you want peace, prepare forwar”—remainsas relevant as ever. A defense-critical patent box system can help the United States achieve a peace of the strong by better preparing for war. This article is anAmerican Affairsonline exclusive, published July 3, 2026. Notes1Paul K. Davis and Peter Stan,Concepts and Models of Escalation(Santa Monica: RAND Corporation, 1984). 2Herman Kahn, “On Escalation,” inUS Nuclear Strategy, ed. Philip Bobbitt, Lawrence Freedman, and Gregory F. Treverton (London: Palgrave Macmillan, 1989), 47–71. 3Michael Lind, “Rethinking the Unthinkable: Nuclear Weapons and American Strategic Insolvency,”American Affairs9, no. 4 (Winter 2025): 163–70. 4Macdonald Amoah, Morgan D. Bazilian, and Lt. Col. Jahara Matisek, “Over 11,000 Munitions in 16 Days of the Iran War: ‘Command of the Reload’ Governs Endurance,”Royal United Services Institute (RUSI), March 24, 2026. 5Seth Robson and Yoojin Lee, “South Korea Objects to US Military Moving Air Defense System to Middle East,”Stars and Stripes, March 11, 2026. 6Anduril Industries,Rebuild the Arsenal, Part 2: The Problem of Defense Production(Costa Mesa: Anduril Industries, n. d. ). 7Office of the Under Secretary of War for Acquisition and Sustainment,Acquisition Transformation Strategy: Rebuilding the Arsenal of Freedom(Washington, D. C. : U. S. Department of War, 2025), 4. 8David R. Prasser, “10 New Defense Companies Leading in Military Innovation,”StartUs Insights, November 11, 2025. 9Sharon Terlep and Marcus Weisgerber, “Pentagon Approaches Automakers, Manufacturers to Boost Weapons Production,”Wall Street Journal, April 15, 2026. 10“Four Surprising Companies That Supply the Defense Industry,” Fox Business, February 8, 2013. 11Sam Stebbins, “Companies You Didn’t Know Were Military Contractors,”24/7 Wall St. , January 19, 2024. 12Mary Cowx, Rebecca Lester, and Michelle Nessa, “Bad Breaks: Why US Tax Policies Put Innovation at Risk,” Stanford Institute for Economic Policy Research, May 2025. 13Ronald B. Davies, Dieter F. Kogler, and Ryan Hynes,Patent Boxes and the Success Rate of Applications(Oxford: Centre for Business Taxation, Saïd Business School, University of Oxford, June 2020), 36. 14Alex Mengden, “Patent Box Regimes in Europe, 2025,” Tax Foundation Europe, July 15, 2025. 15“What Is the Super-Deduction Ratio for R&D Expenses in China?,”Giaxi Global, January 10, 2026. 16“R&D Tax Credits and Deductions Explained,”Bloomberg Tax, March 4, 2026. 17Cowx, Lester, and Nessa, “Bad Breaks: Why US Tax Policies Put Innovation at Risk. ”18U. S. Department of the Treasury,Approaches to Improve the Competitiveness of the U. S. Business Tax System for the 21st Century, chap. 3, “Business Tax Reform with Base Broadening/Reform of the U. S. International Tax Rules” (Washington, D. C. : U. S. Department of the Treasury, 2007), 43. 19U. S. Congress, House,Manufacturing Innovation in America Act of 2013, H. R. 2605, 113th Cong. , 1st sess. , introduced in House July 10, 2013. 20Bernie Becker, “Tax Writers Mull New Breaks for Innovators,”Hill, June 9, 2015. 21For an example of the former, see: “A ‘Patent Box’ Would Be a Huge Step Back for Corporate Tax Reform,” Citizens for Tax Justice, June 14, 2015; for the latter, see: Curtis Dubay, “An Innovation Box for the U. S. ? Congress Should Focus on Business Tax Reform Instead,” Heritage Foundation, August 18, 2015. An argument in favor of a patent box or “innovation box” system can be found in: Robert D. Atkinson, “An Easy Check-Off for U. S. Competitiveness: The Case for a U. S. Innovation Box,” Information Technology and Innovation Foundation, November 30, 2015. 22Andrew Huang,Thinking Outside the (Patent) Box: An Intellectual Property Approach to Combating International Tax Avoidance, (Washington D. C. : Roosevelt Institute, 2018), 21. . 23Patent Box Relief Statistics, 2025, Innovation Tax,Patent Box Relief Statistics 2025: Key Findings from HMRC’s Latest Release – Innovation Tax24“Leveraging Government Incentives: How the Patent Box Scheme Drives Innovation and Tax Savings,”Monthly Industry Monitor, March 24, 2025. 25Cristina Enache, “Sources of Government Revenue in the OECD, 2025,” Tax Foundation, May 22, 2025. 26“The Global Minimum Tax and the U. S. ‘Side-by-Side’ Agreement,” Conference Board, February 10, 2026. 27U. S. Department of Defense, Office of the Under Secretary of Defense for Acquisition and Sustainment,Intellectual Property Guidebook for DoD Acquisition(Washington, D. C. : Department of Defense, 2025), 7.