Reconciliation bill Taxation Effects of innovation
When examining the impact of tax policy on the economy, researchers typically look at labor supply and investment responses. Another channel through which taxes impact the economy has been less studied: innovation. A new document from the National Bureau of Economic Research (NBER) reviews the literature and concludes that taxes have a significant impact on both the quantity and quality of innovation, as well as on the choice of where to innovate.
As lawmakers debate tax increases in the reconciliation plan, they should know that higher taxes come with several tradeoffs, including less innovation.
Using state-level patent data since 1920 that disassociates business and non-business innovation, economists Ufuk Akcigit and Stefanie Stantcheva find that personal and corporate income taxes have “significant negative effects on the amount of innovation” in all states. Patents are also shifting from the non-corporate sector to the corporate sector as corporate taxes decline.
Among individual inventors, higher personal income taxes reduce the likelihood of owning a patent as well as the number of patents held. The quality of innovation, as measured by patent citations, was also negatively affected. In total, a 10% change in personal income tax will reduce filed patents and patent citations by about 6%.
Using international patent data, the authors also found that fees affect the mobility of inventors between states and countries, indicating that inventors may be much more sensitive to higher fees than others. highly skilled workers. In particular, the location of “superstar” inventors, those who feature in the top percent of patent citations, were significantly affected by taxation, especially if they worked for a multinational corporation. Additionally, foreign superstar inventors were more responsive than domestic superstar inventors: a 10% increase in marginal tax rates for foreigners resulted in a 10% increase in migration. Inventors, however, were less likely to relocate if they were surrounded by other talented inventors or a good research infrastructure, as in Silicon Valley.
Given that a relatively small group of inventors drive innovation and respond to taxation, it is not clear whether the optimal tax policy for innovation is one that lowers the highest marginal tax rates for innovation. everyone, or one that specifically targets that group of taxpayers through a research and development (R&D) grant or tax credit. In a separate document, Stantcheva argues that because higher productivity firms generate more innovation for a given R&D investment, the optimal tax policy would first be to tax highly profitable firms less with a lower marginal profit tax. Then, for those who invest heavily in R&D, reduce their R&D subsidy for each additional dollar of R&D investment. The combination of policies would avoid incentivizing low productivity firms to invest more, as these firms get less bang for their buck.
Even though inventors often seek innovation for itself rather than for monetary gain, they nonetheless face financial incentives that affect how and where they will invest. If a high tax burden reduces their ability to experiment and innovate, this could have broadly negative implications for long-term economic growth, which lawmakers should keep in mind when considering increasing personal taxes. and corporations.
Was this page useful for you?
The Tax Foundation works hard to provide insightful analysis of tax policy. Our work depends on the support of members of the public like you. Would you consider contributing to our work?
Contribute to the Tax Foundation
Let us know how we can better serve you!
We are working hard to make our analysis as useful as possible. Would you consider telling us more about how we can do better?