Blog Post

AEIdeas

The New York Times editorial board is truly, madly, deeply confident that if the United States taxes rich people and corporations in a way no other advanced economy does, all will be well. Keep calm and carry on, Silicon Valley! Although conceding in a new editorial that “experts have an imperfect understanding of what drives innovation,” Team NYT goes on to trippingly conclude that “there is little evidence to justify … concern that tax increases of the magnitude proposed by Ms. Warren and other candidates for the Democratic presidential nomination would meaningfully discourage innovation, investment or economic growth.”

Or not. Maybe it’s worth reviewing, say, news from the St. Louis Fed where “the evidence suggests that both innovation and venture capital investment increased significantly after the Tax Cuts and Jobs Act.”

But let’s think broadly for a moment about the novel and risky experiment being proposed by the “broken capitalism” crowd. The World Economic Forum’s new global competitiveness report ranks the US economy as the most competitive big economy in the world, calling it an “innovation powerhouse.” Likewise, no other big economy generates as many super-entrepreneurs or high-impact startups. Jeff Bezos, the Google Guys, Mark Zuckerberg, and Elon Musk aren’t superrich because their parents were billionaires or they were cronies of top politicians. They built companies that consumers and customers greatly value, with their wealth — as massive as it is — reflecting only a tiny portion of that value creation.

Now here comes the Warren plan. First, tax the wealthy in a way and at levels that most other advanced economies have abandoned. (Only four of the 15 European countries that tried even a tiny wealth tax in recent years have stuck with it. And, by the way, the much-praised egalitarian nations of Scandinavia have as many billionaires, relatively, as the US does)

Second, tax corporations at levels all other advanced economies reject. (Rich countries have top corporate rates only slightly higher than the US rate, with Scandinavia about the same.)

Finally, characterize the entire economy as “rigged” and thus all successful people and companies as pretty much corrupt flim-flammers. (When Europeans wonder where their Googles, Amazons, and Apples are, the issue of a corrosive anti-success attitude is frequently mentioned). But what big lesson does Warren take from Europe? That there need to be worker representatives on corporate boards, like in Germany.

One more thing: That bit from the New York Times about “experts have an imperfect understanding of what drives innovation” caught in my brain. Where had I read something similar? Then it hit me. Check out this from “Taxation and innovation in the 20th century” by Ufuk Akcigit, John Grigsby, Tom Nicholas, and Stefanie Stantcheva: “Understanding how taxation influences innovation is of central importance to create investment incentives for R&D, yet our knowledge remains limited due to a lack of data, especially covering a long period of time.”

Well, the NYT got it right — but only partly. The researchers then conclude as follows in a column based on their work (italics by me): “This column uses newly constructed datasets from the 20th century to examine the effects of both personal and corporate income taxation on inventors, as well as on firms that do R&D. It finds consistently negative effects of high taxes on innovation over time as well as on individual inventors and firms.”

Look, the US needs to become even more innovative and productive. At least, that’s if it wants to grow anywhere near as fast in the future as it has in the past. A novel experiment in heavy taxation of risk taking and investment seems misguided at best.