According to the approach suggested here, we should fully analyze the effect of the tax system and of proposed reforms on incentives to invest in domestic R&D, as different tax rules create different incentives. Given the effect of the tax system, we should adopt a subsidy equal to the marginal positive externality from additional investment in R&D. In designing the subsidy, we should explore what structures and features would optimize domestic spillovers from R&D, whether it would be desirable to administer the subsidy through the tax system, and how to do so.