Uncle Sam's Invoice for Innovation.

• Author: Grigsby, John
• Position: AMERICAN INGENUITY

MAJOR REFORMS to the U.S. tax code under the 2017 Tax Cuts and Jobs Act has renewed interest in the longstanding question--do taxes affect innovation? If innovation is the result of intentional effort, and if taxes reduce the expected net return, then the answer should be yes.

Yet, when we think of path-breaking, superstar inventors from history--such as Wallace Carothers (DuPont), Edwin Land (Polaroid), or William Shockley (Bell Labs and Shockley Semiconductor Laboratory), we often imagine hard-working and driven scientists who ignore financial incentives and merely seek intellectual achievement.

More generally, if taxes affect the amount of innovation, do they also affect the quality of the innovations produced? Do they affect where inventors decide to locate and what firms they work for? Do they affect where companies allocate research and development resources and how many researchers they employ?

Answers to these questions, while crucial to a clearer understanding of a vexing current policy issue, have remained elusive due to a paucity of empirical evidence. In fact, in the absence of systematic data, ambivalence toward tax policy may stem from a reliance on isolated cases or anecdotes to confirm or reject particular viewpoints.

The gap in our knowledge especially is large when trying to understand the impact of tax policy on technological development over the long run. Although the U.S. experienced major changes in its tax code throughout the 20th century, we do not know how these tax changes influenced innovation at either the individual, corporate, or state levels.

Our goal is to analyze the effects of both personal and corporate income taxation on inventors systematically, as well as on firms that did R&D during the 20th century. To our knowledge, this never has been done before because of the lack of data. Our analysis leverages three new datasets.

First, we construct a panel dataset on inventors based on digitized historical patent data since 1920. This panel data allows us to track inventors over time and observe their innovations, citations, places of residence, technological fields, and the firm (if any) to which they assigned their patents.

Second, we build a dataset on firms' R&D activities over the 20th century, specifically the number of laboratories operated and research employment. This data was obtained from the National Research Council Surveys of Industrial Research Laboratories for the period 1921-70.

Third, we...