Do tax cuts produce more Einsteins?

Bell, Chetty, Jaravel, Petkova and Van Reenen in a new working paper say not so much.  And indeed their intuitions are not surprising.  Tax cuts boost the prospects of those individuals who already exposed to the possibility of being innovators, and that is not everyone.  Talent searches — to identify and mobilize potential creators — might be more productive.  Furthermore, tax cuts could just draw in lots of marginal innovators, whereas the really important contributions come from a fairly small number of top performers.  Those top performers reap such high returns/rents that they will not so much be deterred by higher tax rates.

The key decision in their model is whether or not to enter the innovation sector, and in that setting you can see that higher marginal tax rates probably do not stop Brin and Page from creating Google and earning lots of money.  A smaller fraction of the value they created is still a huge sum.

And yet I am not convinced.  There is another way to think about and model the process.  Imagine instead that innovation is a matching process, whereby the most talented creators must be matched to the appropriate infrastructures and ecologies.  A given entrepreneur can choose to “think big” or “go small,” the latter involving less work and less risk.  Optimal marginal tax rates can be much lower in that model, because there is easier substitution into lower-valued activities, just as optimal tax rates are much lower in matching models for CEO productivity and pay.  Pushing the best CEOs to less important firms can bring big losses in output, just as pushing the best innovators to less important projects can work pretty much the same way.

You might also introduce into the model venture capitalists, namely people and firms who (among other things) help match innovators to the right projects.  If you tax innovators, might some of the incidence fall upon venture capitalists, who now must accept a lower percent of the return from the project?  And what are the secondary consequences of that?  I don’t know, but they might be quite different from what is laid out in this model.  Tax incidence should not be treated as so simple.  Innovation is not a solo endeavor (as progressives will insist on telling us in other settings), rather it is about clusters of excellence and mutual inspirations.  And when clusters matter, there is a positive externality from innovation from each innovator, which again militates in favor of a lower tax rate on innovators.  If anything, a “clusters model” would seem to favor taxes on land, not on innovation.  Furthermore, perhaps we should even subsidize top innovators.

The general point is that when matching and clusters matter, optimal rates of taxation on innovators tend to be lower.

Comments

This makes a load of assumptions. Wow.

we are making the assumption that the title
"Do tax cuts produce more Einsteins"
is straussian

I can see two confusions straight away. One is that inventors and market innovators are the same people. The other is that market innovations are supply driven.

Often a market demand matures, and the smart and/or lucky innovator is there to fill it.

Sometimes that is a bit forced, as in internet connected and rented electric scooters.

Apple would disagree with you. Consulting in general would disagree with the assumption the client/consumer knows exactly what he needs. iPhone?ipod? There’s a whole literature of adoption curves here that you’re ignoring. Whatever.

Tax rate is not the primary lever here. It’s how complex the tax code is. There’s nothing quite as idiotic as throwing thousands of hours of brain power at limiting tax liability. Surely among the best tax lawyers money can buy are some dudes with an idea.

Want to boost innovation? Simplify the tax code, pass tort reform, pass patent reform, allow immigrants to use their credentials (MD, Etc) and institute a tiny financial transactions tax. You’ll get more innovation if it’s the real method to make money. There’s so many rent seeking opportunities and careers (doctors, lawyers, bankers...) that the risk vs reward is too high on the margin for almost anything except software as a service or rent seeking.

As always there’s a reason we’re stuck in a local maximum, and its name is public choice economics. What’s the constituency for tax simplification, for tort reform, for letting MDs practice here etc?

No one.

The iPod and iPhone both follow the "don't be too early rule." Surely you know this and are running a silly troll.

"In 1996 AT&T developed the FlashPAC digital audio player which initially used AT&T Perceptual Audio Coding (PAC) for music compression, but in 1997 switched to AAC. At about the same time AT&T also developed an internal Web based music streaming service that had the ability to download music to FlashPAC. AAC and such music downloading services later formed the foundation for the Apple iPod and iTunes."

"Early smartphones were marketed primarily towards the enterprise market, attempting to bridge the functionality of standalone personal digital assistant (PDA) devices with support for cellular telephony, but were limited by their battery life, bulky form, and the immaturity of wireless data services. In the 2000s, BlackBerry, Nokia's Symbian platform, and Windows Phone began to gain market traction, with models often featuring QWERTY keyboards or resistive touchscreen input, and emphasizing access to push email and wireless internet. Since the unveiling of the iPhone in 2007, the majority of smartphones have featured thin, slate-like form factors, with large, capacitive screens with support for multi-touch gestures rather than physical keyboards, and offer the ability for users to download or purchase additional applications from a centralized store, and use cloud storage and synchronization, virtual assistants, as well as mobile payment services."

If you think apple is inventing new device categories, you're not paying attention. They're a marketing company, convincing normies that they need sexified versions of things nerds have already been playing with for years. The only thing apple has 'invented' is their plethora of proprietary cables.

@Hmmm - +1 for mentioning "patents" . I'm pleasantly surprised there are ten mentions of patents in the comments in such an obvious post that cries out for citing the word "patent"

I once had a billionaire innovator tell me that it was important to be second into a market. I doubt it is that simple, but the general principle is well accepted. If you are too early with a smartphone or electric car you can spend as much as you want, getting nowhere. Technologies are not mature, prices are too high, customers are not interested. Hit it just right, and you're in. To late and you face dominant players.

There are "lucky clusters," if you want to look at it that way. And based on scooters and Juicero, I don't think these people are at all cash starved.

It looks to me like it's all about whether the market they see is real and ready.

Instant Pot as the preeminent 2018 example of successful innovation? What lesson does that hold?

Lower marginal tax rates might have some correlation with lessor innovations like those "Seen on TV" gadgets and gizmos. But to the big, paradigm-shifting stuff it probably doesn't matter. California has the highest state taxes of any state and San Francisco has the highest city taxes of any city but they carry their weight in risks and innovations and people continue to cluster there for interesting work. I like the land tax idea you suggest and this might be a direction California should look into especially given its housing situation.

Henry George was inspired by California over 100 years ago. No surprise here. "What the Railroads Will Bring Us" should be required reading in California schools again.

https://quod.lib.umich.edu/m/moajrnl/ahj1472.1-01.004/293:1?rgn=full+text;view=image

I hear this argument a lot - "California is so liberal/high tax/etc yet generates all this innovative/GDP/etc".

Correlation correlation. CA is a highly desirable place to live. It has the culture of the east coast with better weather. Is there any chance it's persistence despite "innovation killing" policies is derivative of the fact that, frankly, these people have more money then they need and optimize to be in the most desirable location. Once there, the network effect pulls in other, less solvent, individuals who (correctly) identify that the local network effect is worth the cost.

Yes it's much cheaper for Musk to be in Nebraska, but why the hell would Musk want to be in Nebraska? His money cannot buy him a better climate, network, restaurants, etc, in Nebraska.

Einstein was an inventor (he shared a patent for an innovative refrigerator) but this was not his main contribution to society, and I don't think he was representative of innovators. Perhaps Edison would have been a better name for the title.

In the context of winning gold medals, there is now a lot of experience in finding and nurturing young talent. Perhaps - if political will existed - this could be applied more widely to academic achievement. The mathematical olympiads are one step in this direction.

Unfortunately for enthusiasts in low taxes and even in democracy itself, there are no obvious signs that a low tax democratic society is necessary to produce either excellent runners or excellent mathematicians. The success of democracy has been in organizing very large scale very sophisticated co-operation, such as is needed to develop integrated circuits, not in producing individual excellence.

I don't understand Raj Chetty's obsession with Einstein rather than Edison as a successful inventor. As a former patent clerk, Einstein loved inventing stuff -- he earned something like 50 patents in his life, although only his refrigerator was of much significance -- but 99+% of his historic significance was as a scientific discoverer rather than as a technological inventor. Einstein's urge to get rich off inventions is a fun fact about him, but his place in history is assured due to his magnificent but not very monetizable discoveries about space and time.

In contrast, Edison was all about getting paid, even though Tesla beat him in the race to the biggest invention of the age: what kind of current to provide to America.

The innovator is stuck in a bottle necked society of debt and government fraud. The innovator invents his escape, a technology or process that puts a wall between the innovators life and the fraudulent government. Video games? Bitcoin? Digital payments? Telegraph was a big one. Amateur radio, allowed the farmers of 1920 to obtain national prices instantly on their products.

I am not saying, I am suggesting a motive based on scarcity which has to be ruled out.

Why would anyone think that? Any effect would be too small to measure. There are many ways to get more Einsteins, one would be to reduce the tax system to something so simple there would be almost no need for tax and finance specialists. The number of brilliant minds occupied in trying to minimise tax and maximise profits through incredibly complex financial engineering is a massive waste of talent.

One could argue that gaming our financial system and being richly rewarded for doing so could produce more Einsteins. See all the math whizzes at banks, trading firms, hedge funds, and ad-based tech companies. Marginal to negative value produced but lots of profit extracted.

Solving sudokus, puzzles or playing video games is a waste of talent. I say it a as gamer. I prefer to live in a place where I have the liberty to waste my time as I wish, instead of some low IQ police counting my research hours, spying my conversations or testing my loyalty the to the dictator.

So, we're individuals and everyone is free to choose their work. It might be a waste that brilliant minds work on tax minimization or algorithm trading, but there's not way that respects fundamental human rights to make those brilliant minds work on something you consider "valuable".

No one is making anyone do anything. If we simplify the tax code and all the unemployed tax minimizers and algorithm traders want to play Sudoku, that's fine. But if they like making money, they will reallocate their talents and almost certainly provide more social benefit than they are now.

Einstein has *two* "ei"s in his name. I knew at an early age that I couldn't possibly compete with that. Sure enough, I got an undergrad physics degree then bailed.

"In this paper, we study how such financial incentives affect individuals' decisions to pursue careers in innovation."

I hope this is the first in a long series of working papers and critical reviews:

"In this paper, we study how such financial incentives affect individuals' decisions to pursue careers in basketball".

Query: Do tax cuts produce more Lebron Jamses's?

In this study, we how such financial incentives affect individuals' decisions to enter acting?

Query: Do tax cuts produce more Marlon Brando's?

Of course, "financial incentives" in this "working paper" were not limited to tax cuts. They included other things such as research grants (why not add tax exempt entities, their endowments and their donations to "financial incentives"?). So, I would suggest as another possible "working paper":

"In this paper, we study how such incentives affect the decisions of individuals to pursue careers in academics".

No query needed-- that's money well diverted from everyone else, particularly if it produces more Raj Chetty et als and more working papers!

Reply to Vivian. Another possibility –

Query: Do Right-To-Work states produce more innovation?

The ten least innovative states are all R-T-W states. The ten most innovative states are all non-R-T-W states.

It would probably be right up there with the rest of those other possibilities. So, why not finance that study with some public money to support some budding economist? I would be particularly interested in the conclusion as to how forcing people to join unions and pay dues to them is the *cause* of greater innovation!

And, for a particularly innovative working paper, I would suggest that that young economist be forced to join a union and pay her dues!

Reply to Vivian -

If focus on R-T-W does not boost innovation, how would funding an economist help? Some economists might lean toward boosting innovation with the biggest tax cut in history.

See the link below for factors key to innovation. For some reason, tax cuts did not make the list.

https://www.bloomberg.com/graphics/best-and-worst/#most-innovative-in-u-dot-s-states

"Query: Do Right-To-Work states produce more innovation?"

Correlation does not equal causation. Furthermore, you're wrong.
Virginia is in the top 10 and it's a Right To Work state.

https://www.techrepublic.com/article/the-10-most-and-least-innovative-states-in-america-in-2018/

It seem unlikely that unionization is causal with high innovation. I think you are just trying to randomly correlate data.

Virginia jumped from #11 on Bloomberg’s list from 2013 up to #7 per your link from 2018. Virginia has done well and should be recognized for their accomplishment. For other R-T-W states, innovation is either not the goal or they have no clue how to achieve the goal.

or mebbe before you make a bold claim like that you should
define innovative

One could say Einstein’s achievements and innovation both have advanced the common good and benefited the public interest.

Some states consistently do well and some regularly under perform at advancing the common good and benefiting the public interest. For under performing R-T-W states, advancing the common good and benefiting the public interest is either not the goal or R-T-W states have no clue how to achieve the goal.

Marginal tax rates probably make little and random difference.

Check your biases :-)

Tyler, a prominent journalist at the FT once told me there's a classic trade off between taxes/redistribution and growth.

He said it off hand, like it's an obvious and accepted truth. But beyond pointing to full blown communism and Econ 101 theory around efficiency, he had nothing to support it. As far as I know, he remains convinced... to him it just must be true.

I sometimes wonder if you're a bit like him.

Check your biases :-)

Your advice was good advice to Tyler, though I suspect that Tyler was just examining the idea not assuming it had to be true.

But then you followed it up with this post and your own obvious biases. It's silly to proclaim that the only support for " a classic trade off between taxes/redistribution and growth." is full blown communism.

"Using annual data from 1965 to 2007 for a panel of twenty-six economies, the results show that the effect of an increase in taxes on real GDP per capita is negative and persistent: an increase in the total tax rate (measures as the total tax ratio to GDP) by 1% of GDP has a long-run effect on real GDP per capita of –0.5% to –1%. "

https://pdfs.semanticscholar.org/d689/5ad24d07a76cfdb1bd8295be84c2b8f55489.pdf

Well, Einstein was a refugee, Sergey Brin self-describes as a refugee. It's rather surprising, but the precondition for innovation is........being alive.

More than marginal tax rates, I'd look at that Sala i Martin quote: "China will never surpass the United States in the field of technology. The Chinese have access to 1.3 billion brains. The United States has access to 7 billion."

What Cowen would prefer is more tax cuts for the wealthy. Somehow that's is supposed to unleash the creative juices of the wealthy and increase the wealth of all working Americans, even though tax cuts for the wealthy adopted over the past 40 years have mostly benefited . . . the wealthy. Maybe it's time for Cowen and his like-minded friends to consider something different for a change. https://www.nytimes.com/2019/02/03/opinion/democrats-wealth-tax.html

Yeah, lately I feel like I’ve been reading a lot of mood-affiliated, defensive, arbitrary Tyler. It’s kinda striking held in relief against the rest of his writing.

Everyone agrees - tax Democrat’s wealth.

But the world is already over-provided with theoretical physicists.

If I were going to quit my job and "take a chance on something", then my primary worry would be how it would affect what you might call minimum acceptable life items:

1) Decent housing in safe neighborhood with good schools.
2) Ability to attract decent mate to start family
3) Ability to afford good education tailored to my children needs
4) Access to whatever necessary healthcare I need.

When people take chances, it's because they think those things will wind up alright somehow. One reason you primarily see the young taking chances is because they think they can "fail for five years and then still get on the square path if I have to later in my 20s before much of that is important".

I would say the best way to get innovation at the individual incentive level is to make those things more available and lower cost. Sadly, I think anyone who tried to "help" in those sectors would simply restrict supply and subsidize demand.

+1. I don't get why the focus on tax rates. Cheaper housing, education, and a middle class lifestyle would have a much bigger impact than these inane, wonky debates on marginal topics. It's almost like the elites are trying to shift our attention away from the real issues again. Looks like we might need to vote in more populists until they listen.

+2. This has always seemed so obvious to me that I regard obliviousness to it as being complete;y feigned.

That's not an unreasonable take even though a couple of your points are not relevant to such a debate (e.g., one's ability to attract a decent mate I submit is an individual responsiblilty and choice). What I think you mean is that there should be an adequate publicly- financed social net to make risk-taking more feasible. Within reasonable bounds, I agree with the general point. However, there's a potential flip side to that. For every person who quits his or her job to take on some risky venture, how many could there be who quit their jobs to do nothing or to risk nothing? That's where margins come in. Do they take us outside a proper balance? Good policy (and politics) require a proper balance. Current politics and policy debates are being controlled by extremists on both ends. What ever happened to the reasonable middle? A proper balance is something not likely to be acheived by letting the debate be controlled by the unbalanced.

One test would be to ask if countries with the the strongest social safety nets are hotbeds of technical innovation or other notable achievement.

Or are the children of wealth (trust fund kids, with the best private social safety net) known for their inventions, development of medical advances, or great novels?

What if you were bold enough to ask that question about US states?

https://www.statista.com/statistics/256731/number-of-patent-grants-in-the-us-by-state/

That's the right question and this is the growth rate of patents per capita by state (1963-2015)

https://developer.uspto.gov/visualization/utility-patents-state-over-time

Vermont patents are driven by IBM. Washington by Microsoft and Boeing. California grew from 20 to 40 million people over that time. Even though, is well ranked. Then......Texas.

As a minor quibble, I chose the bulk numbers over the per-capita because the total innovation is what benefits the nation (and the world).

In that regard California really is the elephant in the room.

And that's the reason China has an advantage. With 1.4B people, total innovation is going to be high.

Reason to crank up those h1b visas. The fit right into the California culture.

I don't really think there is any specific "test" possible in part because nobody will agree what a(n) (valuable) "innovation" is. Does it include, for example, better logistics and supply chains which are not subject to patent? Pretty much impossible to measure, but if you've got an ideology to advance, one can always find a way. Drawing from your list, however, I think that a disproportionate (i.e., non-random) number of innovations in the fields of inventions, medical advances and "great novels" have come from those with relatively better "private social safety nets", "trust funds" or not. But those are limited examples of "innovation" and those folks probably had, on average, better parents with better genes. It is generally accepted that the US is a center of innovation, despite the frequently held idea that there is an inadequate social safety net. Does the U.S. compare favorably on that score with, say, communist Russia or communist China? The better answer is usually in the middle. Moderation is an underestimated virtue.

And, a better question regarding marginal tax rates is not whether they affect the "production" of an innovator, but whether, in the modern world, they affect where a proven innovator might choose to apply his or her skills. This might constribute a little to the relative success of the US. For example, why didn't Emmanuel Saez and Gabriel Zucman choose to further their innovate skills in France and remain there? I miss them here in my socialist paradise!

Re: innovation and safety nets.

Norway has a great social safety net, but beyond the web browser Opera, it is more notable for outsized winter sport achievements, and politicized Nobel Peace prize awards. Norwegians did invent the chese slicer https://en.m.wikipedia.org/wiki/Cheese_knife#Cheese_slicer and re invented a poorer paper clip https://en.m.wikipedia.org/wiki/Paper_clip , but those were both before the welfare state.

They are getting oil below those frigid waters. At least they're brave and there's lot of people with knowledge of the sea, geology and how fluids behave in a recipient (human capital).

Norsk Hydro was among the first (perhaps the first) oil company to drill offshore horizontal wells to extract oil from from the Troll field. Baker Huges provided the technology, but one manager had to bear the risk of the decision.

They also developed a cheaper LNG plant to be able to export gas to central Europe since it was to expensive to build a pipe that long.

Perhaps simpler to understand, this impressive thing: https://en.wikipedia.org/wiki/Troll_A_platform

And once you build the largest movable structure on Earth.....you start thinking about why. From the wells comes a mix of oil, gas, water and sometimes sand. The technical term is multiphase flow. Usually, this mix is separated on the oil platforms and then pumped to the shore because multiphase flow destroys pumps and pipes. The problem is that you need to operate the separation process offshore which means large structures high costs. Multiphase flow research is comprised under the boring name of "flow assurance" which makes the exploitation on an oil field economical or not. Norway is the leader.

Once in the path of minimizing the size of oil platforms, why not simply get rid of them with subsea robots? The Norsk are also working on that.

Oil production technology won't win a popularity contest in these days, but surely beats a cheese slicer and provides cheap gas for all countries.

It should be clear by now that writing about oil/geology/offshore/fluid dynamics give me a hard on. I'm not ashamed =)

If you give someone from the underclass enough money to purchase a house in the bad part of town and go to the grocery store, then you've given them enough meet their needs.

However, if that is all you can guarantee someone who is a potential innovator (hint: relatively high IQ) then that sort of income (don't most UBI proposals come in around 10k/year or something) would fall well short of even a spartan lifestyle that would be acceptable to anyone trying to attract a mate from the same social caste and raise a family.

I'm thinking something more along the lines of "if the risk I take goes nowhere, what % of my safety route income could I count on in the worst case." 10k/year might be a very high % for those with no potential, but a very low % compared to those we would want taking risks.

Note that "money" isn't necessarily the main problem here. Safe neighborhoods, good schools, and quality healthcare already get LOTS of money thrown at them. The problem is the zero sum nature of those "markets" as they exist today.

Arguably those things are all readily available to folks in the US. Maybe not in every single metro, but I but in most metros you can find cheap housing in a neighborhood that is acceptably safe. The reason it is cheap is that the schools are deemed "bad" but the research indicates that if you yourself are smart and hardworking, your kids don't need to be surrounded by upper-middle class peers in elementary school to come out with test scores and learning in the 90th to 99th percentile (it is mostly genetics).

Then by the time you reach middle school/high school, you can just get them into a decent charter school or into a magnet school that has an entrance exam.

People just want to make things way harder for themselves than is necessary.

Research also indicates that having a significant trouble maker in your class reduces adult earnings significantly. And that being part of a gifted or higher IQ track class makes a big difference to both learning and satisfaction.

Finally, there is the issues of, you know, actual life enjoyment. When I was miserable in middle school and happy in high school my test scores were the same, but I sure liked life a lot more. Not sure why kids should have to go to shit school and be miserable.

Selling a house after five years because things past elementary school suck for you sucks. Financially (it isn't cheap to sell a house) and having to move and change your friends.

P.S. Leftists are trying, often quite effectively, to shut down charter, magnet, and gifted programs (or changing them to discriminate against whites and asians).

I agree, and am aware of the attempt of folks on the left to shut down gifted programs, magnet schools, charters, gifted programs, etc.

I just think that people are a bit too cautious in trying to work the system. Ther are public schools out there that are deemed bad because the students score low on standardized tests, but otherwise have good teachers and good administrators that maintain good discipline in the school. However, to know this, you actually have to investigate the schools, and you also have to show up. I also suspect that if you are white, the teachers and administration will keep an eye out for your kids and put them into the classrooms with the best teachers (and those teachers usually are great with pedagogy and classroom discipline), especially if you do a bit of volunteering at the school and build a little bit of a relationship with the staff and administration. I suspect that they will see your presence, and the presence of your kids at the school, valuable enough to them that they will go out of their way to make sure you stick around.

There are also schools that get low test scores where those things probably won't happen.

That does take an investment of some time, but I suspect that a cost benefit analysis would show that the return on that time (in terms of money saved on housing, and perhaps time saved commuting) would work out well for most people.

Of course, you need to be paying attention to your kids to make sure that the school is working for them, and if not, find a school that is a better fit for them.

If you mean that a 7/10 on Zillow middle class school can be as good as some UMC 10/10 I agree. But I see a lot of 1/10 turds all around me. And even ones that are 7/10 can go 3/10 quickly when “the neighborhood starts to turn”. Compounding this is the fact that your main leveraged asset changes in value based on the district, wether you navigate well or not.

Moreover, both my best man and my wife’s maid of honor are both childhood friends. It seems to me that the people we grow up with so matter quite a bit to our lives. You want to choose good peer groups for your kids.

I suspect that there are schools that are 2/10 that are actually pretty good (in that they have sufficient resources, good teachers, and good administrators). Probably not so much at the high school and middle school level, but for elementary school more likely. I just don't think that there is any good substitute for actually going and investigating potential schools, and that folks are making poor decisions when they don't investigate those 3/10 schools on the "Great Schools" rankings. As you say, the decision of where to live is not one to take lightly.

yeet
don't we have overwhelming empirical evidence that many big innovators have different priorities than the 4 you listed at the time they are starting to innovate
that is one of the tradeoffs

ok. so its probably not me but
look at your language
" When people take chances, it's because they think those things will wind up alright somehow."

what if that's not actually a true statement?

there is an internal contradiction in the two clauses
tu, madame riberio, have underrated risk

yeet and yet aren't you with npr?
risk is not when you think things will be alright-that is safe
risk is actually/obiously when you don't know if things will be alright!

Tech firms have been experiencing lower than anticipated earnings and are warning of more bad news ahead. So what's the cause of the tech decline? The drop in demand for expensive i-Phones for sure, but across tech it has been the decline in cyber currency mining and for cloud data service centers. https://www.nytimes.com/2019/02/03/technology/tech-warning-signs.html I suppose cyber currency mining and cloud data services are innovations, but even if he were around today, Einstein probably would not have invented them or any of the other inventions of tech, as Einstein was a theoretical physicist not an inventor like a Thomas Edison. Edison, as everyone knows, was a founder of GE, which through the years created all kinds of useful products that made life better for most everyone (although, being an industrial company, GE has a spotty environmental record). Today's focus for innovation is on tech. I appreciate Google every time I do a Google search (although I've noticed that Google's algorithms are directing me more and more to products to purchase rather than the information I am seeking). I appreciate Uber every time I need a ride. I appreciate my smart phone when I am traveling and need to call someone or check my email. I don't use social media so I don't appreciate Facebook or Twitter. Tech has certainly made my life more convenient. Of course, tech is all about data: transmitting it, storing it, mining it. Readers of this blog know that blockchain is the ultimate promise of tech, which once accepted and trusted will end the need for intrusive governments. That would be quite an innovation. One can see the irony here: Cowen believes we need to cut taxes so that the innovators can innovate and develop blockchain and thereby end government as we know it and the taxes that support it. Somehow I don't believe the innovators need a tax cut as incentive to bring blockchain to fruition and end government as we know it and taxes that support it. The goal would seem all the incentive that's needed.

It's also possible that innovation, e.g. AI research, can have severely negative externalities on the security of a large number of people.

Is TC talking about Albert or about the bagel shop company? Albert supported himself as a government employee for some years. That couldn't have happened without taxes. Seems to me that when we're out at the 6.75 sigma tail that there's little we can scientifically claim (or measure). This isn't particle physics.
TC => did you really mean to write:"Tax cuts boost the prospects of those individuals who already exposed to the possibility of being innovators..."? you mean "were/are" exposed? poor word choice, "exposed". I just read a reddit post which claims TC is often straussian in (the sense of not saying what he means clearly). I used to do that; a lot of people heard stuff that wasn't there and came up with more creative ideas than I was capable of. While it's a way to nurture innovation, it gave my listeners an enormously inflated impression of my own intellectual capacities. Just sayin'

Yes, mentioning Albert Einstein in this context of "marginal tax rates", "venture capitalists" and even "clusters of excellence" is quite insolite, and perhaps somewhat disrespectful. To TC's defense, he is only quoting the title of the paper he mentions.

madam neurotic,
you say
"While it's a way to nurture innovation, it gave my listeners an enormously inflated impression of my own intellectual capacities."

in one sentence you have underrated a rare talent for mentoring innovation and rebranded that talent as a personality disorder (narcissism)

we"re not havin it sunshine

The assumption that when clusters matters, every innovation that makes a lot of money has positive externalities is false. I don't see any positive externalities coming from the "tobacco cluster".

Here's an interview of psychologist David Dunning that is a reminder that we (that includes me) don't know what we don't know: https://www.vox.com/science-and-health/2019/1/31/18200497/dunning-kruger-effect-explained-trump Dunning can be funny: "How do you get people to say, “I don’t know”? I don’t know."

I think that it would be more useful to calculate and invest a certain optimized amount in each person's 'unrealized potential', realizing that there are cheap gains, quick gains, and various groupings and mis-steps. Of course, this is undefined and - where would you even start?

In the 1980s, Pres. Reagan and fellow Republicans in Congress (Senator Dole in particular) figured out how to cut taxes on the wealthy while raising taxes on the working class and getting many Democrats to vote for it. How did they do it? By framing it as "saving social security". Ingenious. Now, the Democrats are attempting to turn the tables by pushing a plan to "save social security" in perpetuity by raising taxes on people who earn more than $400,000 per year. While the plan does include a slight increase in taxes paid by the working class, the plan's main feature is a very large tax increase for those earning more than $400,000 per year. Will Republicans (including Pres. Trump) oppose a plan to "save social security". Can Democrats pull off what Reagan and the Republicans pulled off in the 1980s? If they do, it should make Reagan proud that he taught Democrats how to do what seemed the impossible.

It's interesting that the word "culture" does not yet appear on this page.

Tyler is often big on cultures, and this might be a time when it is actually more important than taxes. America is a fair innovation culture and the population is pretty open to new gadgets and solutions. I get the sense that Japan and Korea have done so well because they are even more innovation crazy.

Innovation culture > taxes?

And don't forget that ARPA money feeding the innovation culture.

Most interesting blog entry I've seen in a long time. Economics blogging seems to be dormant these days especially since 2016.

Ah, without using the word, Theo does tag California up top as an innovation culture, even with high taxes.

With lower tax rates maybe Einstein would have invented a more efficient car engine, instead of revolutionizing our understanding of the world. (A dubious argument for lower taxes, admittedly.)

Seriously, one could imagine that if financial reward is less available (higher tax rates) then potential geniuses might be drawn to more to academia, where they can earn status. So if anything I expect higher taxes to give us more Einsteins, if possibly fewer Teslas or Edisons.

Low tax rates might not matter too much to any given set of inventors, but all the evidence is that they matter a great deal to companies which tend to employ them.

Go back and understand the difference between Tesla and Edison. One was an inventor, the other was a promoter.

Many of the great names in tech innovation are unknown. Because they didn't get stupid rich, and they were motivated by something besides extreme wealth. Not to mention that they may have been doing at least their initial their work employed in academia or grants, funded by the government.

"Go back and understand the difference between Tesla and Edison. One was an inventor, the other was a promoter."

Meh, Tesla was a little bit more than a promoter, though he clearly wasn't on Edison's scale as an inventor.

Tesla was the inventor of the induction motor. He also deserves a lot of credit for the radio, probably more than Marconi.

So, while Tesla doesn't reach the stature of Edison, he was clearly a very brilliant inventor.

Interesting. I would appraise Tesla as a far better a raw inventor, Edison more oriented towards commercializing.

For all the modern hype about Tesla, he has one lasting invention to his name, the Inductive Motor. He certainly deserves partial credit for the radio and the AC distribution system. But his approach to power distribution was far more dangerous to humans, which was Edison's primary complaint. Granted, Westinghouse didn't care that AC was more dangerous, he just wanted to leapfrog Edison Electric's jump start on power distribution systems. Tesla also didn't care, he was more attracted to the efficiency gains of AC vs DC.

It's noteworthy, that industrial infrastructure is switching from AC to DC, because AC is considered inherently more dangerous DC.

In the final analysis, Tesla was witty, dressed well and was a charming person in his prime whereas Edison was a hard of hearing, crabby poorly dressed engineer.

Pretty sure we won't resolve that question here.

But this guy gets my vote for making it fun: https://theoatmeal.com/comics/tesla

https://www.youtube.com/watch?v=E5KDTw_OQ1Y

If Ray Lopez doesn't show up and talk about patents in this thread I won't know what to believe anymore.

I find it questionable that the researchers assumed that marginal innovations weren't important to "big" innovations. My understanding is that the big innovations came out of clusters of innovators who were all making "marginal innovations" and then a few people saw how to both extend those marginal innovations and bunch them together in new ways to produce something much more than marginal. I think that Einstein is a great example of this, with a bunch of mathematicians and theoretical physicists doing a lot of work about the nature of light and non-Euclidean geometry that Einstein then built off of in a novel way, where none of the building blocks of his theory were new, but he just put them together in new and insightful way.

Sorry, but that anti-Randian analysis is not welcome. There are great men who do great things, spontaneously and independently, in their garages, in ways that are impressive to teenage boys with limited imaginations. Everyone else is just a leech on their individual greatness.

It's kind of funny too, because the view that "marginal" innovations are important to "big" innovations would probably bolster the case that lower taxes are important to increasing "big" innovation.

Is there any evidence that marginal tax rate differences have any impact on the influence of greed as a motivator, or on career choice?

Sure, differences in tax code lead to strategies on what to do with the money once you get it, and will tend to favor tax minimization paths.

But, can you cite any example ever anywhere where some bright college kid decided to skip finance/law/engineering and go work for the soup kitchen, because the marginal tax rates were too high at the upper levels?

My suspicion is that you could do some cross country comparisons as a kind of natural experiment, or at the very least as an investigative check to see if the data falls out how you might expect, one way or the other. Do people in Nordic countries study engineering less than students in a lower tax country, like say Canada? Or maybe how about comparing Anglophone countries to get a better sense of it, although I would exclude the US because of the aberrantly high wages that doctors are paid, which probably diverts a lot of people away from engineering. Of course, one problem with studying the Anglophone countries is that the US is a huge talent suck for the folks in the Anglosphere who do want to make a lot of money.

"the US is a huge talent suck "

how would we control for the fact that the US has onerous regulations and repressive taxes?

The big question I have is why are the largest VC firms in the US, and even then mainly in the SF Bay Area?

Is there any other valid theory besides Clustering?

Granted, there are some structural issues that probably make the US a better choice than China or even Germany. Within the US I suspect that VC could have clustered around New York, Chicago, LA or Houston just as easily.

Moore’s Law + path dependency, with a dollop of ecosystem from defense contracts, Stanford, and lifestyle.

Moore’s law fueled decades of rapid change and opportunity.

Boston was the other contender, around MIT.

It is interesting how far the aerospace goes back, to dirigibles and Moffett Field and the founding of the Ames Research Center.

The fact that the Bay area was, is, and continues to be an epicenter of innovation and new wealth creation - located in the epicenter of liberal tax and regulation hell - is not even a modest conundrum for Great Rationalizing.

Why is the US auto industry still centered around Detroit?

"located in the epicenter of liberal tax and regulation hell"

Clustering overcomes the marginal tax difference. After all, California's top tax rate is only 12%. Furthermore, the regulation hell doesn't directly effect most software companies and the high tech hardware companies have moved a lot of production out of state.

The long term effects are of course being born by the middle class and California now has the worst poverty rate in the country despite all of the very lucrative high tech jobs.

The worst effects, of course, being the problems of too much concentrated wealth

It is really hilarious how many people spend their energy on this page avoiding the positive lessons of California.

And that means you'll never catch up.

It's amazing how many Californians are in denial. California was (and still is for the moderately wealth or very talented) the quintessential American dream. But that dream is fading, and Californian's are burying their heads in the sand. Sure California still hosts plenty of very rich companies. But somehow that wealth doesn't change the lot of those in the ghettos and barrios. All those illegal immigrants that are paid under the table to be your maids and gardeners count as people too.

California has a worse PPP poverty rate than Mississippi. Think about that. Mississippi has a multitude of historical reasons for deep poverty. Yet somehow, California has, over the last decade, become worse.

Supplemental Poverty Measure
https://en.wikipedia.org/wiki/List_of_U.S._states_and_territories_by_poverty_rate

tldr;

"And that means you'll never catch up."

While you stopped to brag about how awesome you were, everyone else passed you,

Low tax rates mean that when the innovator strikes big he will have a lot more money to share with his supporters. A classic example is stock options - innovators give away large shares of their nascent companies to get supporters (eg techs, finance, legal etc) who can turn their ideas into reality. The innovators can only afford to do this because of low tax rates - if these people believe that the rent would all be taxed away they are going to be less motivated to leave their cushy but safe jobs elsewhere. This continues as more and more people come in below them as the company grows. It is obvious that you are going to get more money and better job prospects working for a company worth $10bn than one worth $100m.

yeet and yet
when a lotta innovators have early success they gotta putta alotta loota
for many years back into their innovation in order to refine it

back into their company

Talk about the American dream: the paper asserts that a single great man can change the world alone.

Well Einstein's work definitely changed Japan.

How much did money drive Brin and Page anyway? That was a time of wild greenfields expansion into an entirely new domain, akin to finding a new untapped continent or planet, and lots of people were inventing stuff that now powers the Internet. Not all of it worked but a lot of it did.
Certainly not all of it could be captured as gazzilion dollar returns for the creators. However, this was actually a rare and exciting time where smart people with ideas and skill sets could actually create the future in large chunks rather than incremental improvements.

Why should we assume that "more Einsteins" isn't an anti-pattern, an indication of failure rather than success? When there is one great notable innovator, might that be an indication of innovation suppression? When there is no identifiable innovator, perhaps that is when innovation is really humming.

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