High Taxes Drive Innovators and Entrepreneurs to Low-Tax States: Study

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Posted by Satyajeet Marar on Wednesday, October 11th, 2017, 1:02 PM PERMALINK

A new study has revealed that America’s top-level inventors and innovators are highly mobile and sensitive to tax reform, migrating out of high-tax states to those offering better conditions. The Federal Reserve Bank of San Francisco study monitored the migration patterns of ‘star scientists’ – those with patents in the top 5% of distribution. It revealed that a mere 1% hike to post-tax incomes in individual US states following a tax cut resulted in a 0.4% increase in the stock of scientists within the state, with similar effects observed for cuts to state corporate tax.

The study is good news for North Carolina, Texas and other states which have lowered or maintained low to non-existent income corporate taxes to attract firms and high-skilled workers. It underscores the reality that high taxes discourage productive behavior, driving away those who create value. These states reap scores of benefits including growth in local high tech or scientific industries and flow-on effects including the creation of more high-quality jobs which grow the state economy and boost both paychecks and living standards.

The researcher’s findings are no surprise. Last year, a similar study found that entrepreneurs were highly sensitive to changes in international tax policy, migrating across borders to countries that welcome their contributions through a favorable tax environment.

It is a lesson the US federal government has learned, with plans to drastically cut America’s massive federal corporate tax rate and eliminate perverse disincentives such as the tax on US multinationals attempting to return home profits generated overseas under the Trump administration’s tax reform framework.

At a recent Senate Finance committee hearing, eminent academics in Economics and Law called for reform, noting  that the current regime failed to create a level playing field by disadvantaging US multinationals against foreign competitors who are not taxed a second time on income they return to their home countries. Professor Itai Grinberg of Georgetown University noted that under the status quo, companies were moving management, research & development and even support jobs overseas – depriving the US economy of skills and innovation while actually eroding America’s tax base.

Studies and experience confirm that tax cuts at the state and national level welcome inventors, entrepreneurs and firms who create value and drive innovation. They lay the groundwork for economic growth and prosperity.

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