Taxation and Innovation in the 20th Century

Abstract

This paper studies the effect of corporate and personal taxes on innovation in the United States over the twentieth century. We use three new datasets: a panel of the universe of inventors who patent since 1920; a dataset of the employment, location and patents of firms active in R&D since 1921; and a historical state-level corporate tax database since 1900, which we link to an existing database on state-level personal income taxes. Our analysis focuses on the impact of taxes on individual inventors and firms (the micro level) and on states over time (the macro level). We propose several identification strategies, all of which yield consistent results: i) OLS with fixed effects, including inventor and state-times-year fixed effects, which make use of differences between tax brackets within a state-year cell and which absorb heterogeneity and contemporaneous changes in economic conditions; ii) an instrumental variable approach, which predicts changes in an individual or firm's total tax rate with changes in the federal tax rate only; iii) event studies, synthetic cohort case studies, and a border county strategy, which exploits tax variation across neighboring counties in different states. We find that taxes matter for innovation: higher personal and corporate income taxes negatively affect the quantity and quality of inventive activity and shift its location at the macro and micro levels. At the macro level, cross-state spillovers or business-stealing from one state to another are important, but do not account for all of the effect. Agglomeration effects from local innovation clusters tend to weaken responsiveness to taxation. Corporate inventors respond more strongly to taxes than their non-corporate counterparts.

Do Tax Cuts Produce More Einsteins? The Impacts of Financial Incentives vs. Exposure to Innovation on the Supply of Inventors

“…Much of this research has been conducted using data from Scandinavian registries (e.g., Toivanen and Vaananen 2012, Lindquist et al 2015, Jung and Ejermo 2014, Aghion et al 2017, while other work uses Census data and tax data from the United States , Bell et al 2019. These studies are beginning to yield a richer understanding of the factors that affect who becomes an inventor, ranging from IQ and parental education (e.g., Aghion et al 2017) to childhood exposure (Bell et al 2019) and the impacts of taxation and other policy changes , Akcigit et al 2018).…”

“…We believe that these theoretical predictions are useful because directly identifying the impacts of taxation or other policies on career choice is very challenging. Indeed, even state-of-the-art quasi-experimental studies (e.g., Akcigit et al 2018) identify short-run responses to financial incentives rather than long-term impacts on career choice.…”

How Should Business Profit Be Taxed? Some Thoughts on Conceptual Developments During the Lifetime of the IFS*

“…35 See de Mooij and Nicodème (2008), Liu (2014) and Devereux and Liu (2016). 36 See, for example, Güçeri and Liu (2019) and Akcigit et al (2018). 37 Devereux, Liu and Loretz, 2014.…”

Determinantes De La Productividad Multifactorial: Los Casos De Las Principales Economías Latinoamericanas Y Emergentes De Asia (1960 - 2015) (Determinants of Multifactor Productivity: the Cases of the Main Latin American and Emerging Economies of Asia (1960 - 2015))

“…En cuanto a la importancia del sector público, cabe anotar que, aunque el gobierno puede desempeñar un papel beneficioso para la economía, también puede representar una carga pesada cuando impone impuestos altos a las empresas, utiliza estos ingresos para mantener programas públicos ineficaces y una burocracia inflada, distorsiona los incentivos del mercado e interfiere negativamente en la economía al asumir roles que son más apropiados para el sector privado (Loayza, Fajnzylber y Calderón, 2005). Akcigit et al (2018) y Cai et al (2018) han mostrado, con evidencia estadística, los efectos negativos de los impuestos a las empresas y a los innovadores sobre la actividad innovadora que genera, tarde o temprano, una mayor productividad multifactorial.…”