Highly progressive individual income taxes may be keeping the world’s best inventors away from the United States, according to a new working paper published by the National Bureau of Economic Research.
“For a 10 percentage point decrease in top tax rates, the average country would be able to retain 1 percent more domestic superstar inventors and attract 38 percent more foreign superstar inventors,” the paper said. The paper said “superstar inventors” are those who have the most valuable and highest number of patents.
The best inventors are affected more by high tax rates than lower-quality inventors. “We find that the superstar top 1 percent inventors are significantly affected by top tax rates when choosing where to locate. As one moves down the quality distribution of inventors, the sensitivity to top tax rates decreases,” the paper said.
Inventors working for multinational companies are more likely to move and work in a low-tax country, since multinationals increase international exposure and ease the moving process. However, this effect is limited for inventors working in a highly geographically-concentrated field.
The paper calls inventors “key drivers of technological progress,” making the case for the U.S. to cut its top individual income tax rate. Although the U.S. top individual income tax rate is slightly below the average of developed countries, a cut would further extend that economic advantage.
Not included in the paper’s analysis was the effect of royalties or corporate income taxes on direct patent income. Were it included, the U.S. would likely perform worse, given that its corporate income tax is one of the highest in the world.
As I reported last week, the U.S. federal tax code is clearly progressive. This paper shows the damaging effects such a progressive tax code can have.
According to the Tax Foundation, the top marginal individual income tax rate plus the Social Security rate brings the U.S. income tax to 41.9 percent. Three developed countries have top tax rates between 15 and 19 percent: the Czech Republic, Hungary and the Slovak Republic. The average rate in developed economies is 42.5 percent, just higher than the U.S. rate. The top rate in developed countries is Denmark’s 60 percent.
The paper was authored by Ufuk Akcigit and Salomé Baslandze of the University of Pennsylvania, as well as Stefanie Stantcheva of Harvard.
