Trickle-down economics (the theory that cutting taxes for the rich will lead to benefits for those below) has long been relied upon as a reason for extending breaks to wealthy individuals and corporations alike. The notion has been much maligned by many and some say that the evidence of its truth is weak, but a recent study conducted by the National Bureau of Economic Research suggests that in at least one unexpected way, it may turn out to be true. It seems that when corporations are paying a lower corporate tax rate, they invest more in innovation and deliver higher quality and quantity in that realm. And the converse is also true …. when their taxes increase there is a negative effect on where innovation occurs, on how much is invested in it, and how good that innovation turns out to be.
The results, though initially surprising, make sense. According to the data collected by economists Ufuk Akcigit and Stefanie Stantcheva from reports generated over the last 100 years, the more money that both corporations and individuals have to pay to the government, the less of an investment in time and money they are willing to put into innovation. Invention on the part of individual inventors also slows significantly and its quality diminishes, as evidenced by a dramatic 6% drop in the number of patents filed when personal income tax liability increases by 10%.
The chilling effect of taxation can be seen in more than innovation. Higher tax rates also put a stop to inventors relocating both domestically and abroad, though the lure of working in the company of other movers and shakers can serve to offset the monetary impact. Still, if long-term growth is the end goal, the study's findings suggest that rather than imposing a generic tax increase, an approach that rewards innovation in the form of a tax credit or additional subsidies for research and development may be wise. We may imagine our most creative visionaries – whether employees of large corporations or individual inventors - as having their heads in the clouds, constantly dreaming of changing the world, and that may be true. But they still need to pay their bills and enjoy a good quality of life. If we want the advantages provided by their brilliance, finding a way to soften the blow of high taxes is likely to benefit all of us.
About Martinez & Shanken, PLLC
Martinez & Shanken, PLLC is a Certified Public Accountant (CPA) firm based in Gilbert, Arizona. We provide a full range of accounting, bookkeeping, consulting, outsourcing and business services. Partners Deborah Martinez and Earl Shanken work to ensure your business accounting is done with integrity and to your satisfaction.
