For instance, if the average country decreased the top tax rates by 10 percentage points, it would be able to keep 1 percent more of its domestic superstar inventors and attract 26 percent more foreign superstar inventors.
Monday, May 29, 2017
Do Taxes deter innovation?
Superstar inventors, those in the top 1% of patent production (weighted by patent citations), leave higher-tax countries in favor of lower-tax countries.
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Tax reform and policy have been at the forefront of American politics and citizens. One of the platforms that the current US president won on was tax reform to streamline taxes. This tax reform is popular with the right wing, who believe that less taxes mean more investment in infrastructure, business, innovation, and ultimately economic growth for all. The left wing believe taxes should be levied to help raise revenues for governments so they can support domestic and social equality actions.
ReplyDeleteTaking politics out of the equation, and looking at taxes from an economic standpoint, taxes can have great intensions but they can deter innovation and wealth creation. As Froeb contends; “The intended effect of a tax is to raise revenue for the government, but the unintended consequence of a tax is that it deters some wealth-creating transactions” (Froeb, McCann, Shor, & Ward, 2016, P. 19)
I do believe that taxes can and do deter innovation, companies will move their R & D activities to those markets/countries where that encourage innovation through tax reform that decerase the barriers for innovation. As Owens contends:
If firms have incentives to innovate from the market, is there a role for governments? In particular, can taxation help? Yes–not least because the tax system can be used to help overcome barriers to innovation by reducing the cost of undertaking innovative activities. Research and development (R&D) tax credits, which are in use in many OECD economies, provide tax benefits related to the costs of undertaking specific activities that aim to innovate. Canada, for example, offers a broad-based R&D tax credit of up to 35% for expenses towards experimental development, basic and applied research, and related supporting activities. Accelerated depreciation schemes for innovation-related capital and reduced labour taxes on scientists and researchers are other means. These tools can be used broadly or targeted to specific sectors and outcomes, such as renewable energy (Owens, 2010)
References:
Ansel, B. (2015, February). The effects of taxation on entrepreneurship and innovation. Retrieved from Washington Center of Equitable Growth: http://equitablegrowth.org/equitablog/effects-taxation-entrepreneurship-innovation/
Froeb, L., McCann, B., Shor, M., & Ward, M. (2016). Managerial Economics. Boston, MA: Cengage Learning.
Owens, J. (2010, May). Tax for Innovation. Retrieved from OECD Obserever.org: http://oecdobserver.org/news/fullstory.php/aid/3271/Taxes_for_innovation.html
Todd Barton comment (part 2)
ReplyDeleteA recent study by Stefanie Stantcheva, an Equitable Growth grantee and Junior Fellow at the Harvard Society of Fellows (and future assistant professor at Harvard’s Department of Economics) working together with co-authors Ufuk Akcigit an Assistant Professor at the University of Pennsylvania and Salome Baslandze, a Graduate Student at the University of Pennsylvania, focused on understanding how tax systems affect international mobility and the activity of innovators and entrepreneurs. Per Ansel , “the study combined international data on inventors and their patents, and tax policies across developed economies in order to understand how income taxes, a country’s immigration policies, and companies influences the activity and mobility of inventors as well as the quality of innovative activity. The focus is on superstar or the best of the best inventors, meaning those inventors with the most valuable patentsand have the biggest impact on economic growth. Stantcheva used the results to build a more complete taxation model, which takes entrepreneurship and innovation into account. Stantcheva suggests that a progressive tax code can reduce the profits from any given innovation, thus encouraging inventors and entrepreneurs to move to a lower-tax country. Her preliminary results find that, broadly speaking, this prediction holds true.” (Ansel, 2015)
It will be interesting to see what tax reforms are debated if or when the current administration starts to work with congress on them. One area that could benefit the United States and it’s continued leadership in innovation as a country and those corporation and organization within it would be to take proactive actions on tax reform to decrease the negative effects it has on innovation.
References:
Ansel, B. (2015, February). The effects of taxation on entrepreneurship and innovation. Retrieved from Washington Center of Equitable Growth: http://equitablegrowth.org/equitablog/effects-taxation-entrepreneurship-innovation/
Froeb, L., McCann, B., Shor, M., & Ward, M. (2016). Managerial Economics. Boston, MA: Cengage Learning.
Owens, J. (2010, May). Tax for Innovation. Retrieved from OECD Obserever.org: http://oecdobserver.org/news/fullstory.php/aid/3271/Taxes_for_innovation.html