Taxation and Innovation in the 20th Century
95 Pages Posted: 17 Sep 2018
Date Written: September 5, 2018
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) 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, quality, and location of inventive activity 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.
Keywords: Innovation, income taxes, corporate taxation, rms, inventors, state taxation, business taxation, R&D tax credits
JEL Classification: H24, H25, H31, J61, O31, O32, O33
Suggested Citation: Suggested Citation