Taxation and the Creative Class

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Urban geographer Richard Florida has famously argued that members of the “creative class” — scientists, entrepreneurs, artists and other professions who contribute disproportionately to economic growth — gravitate to metropolitan regions marked by the three “t’s” — technology, talent and tolerance. Now new research suggests that he may have to add a fourth “t” — taxes.

A National Bureau of Economic Research paper, “Taxation and the International Mobility of Inventors,” studies the effects of taxation on the international mobility of inventors, with an emphasis on the superstars who have the most, or most valuable patents. The results suggest that a 10 percentage-point cut in a nation’s top tax rates is associated with about a 1% increase in the number of domestic superstar inventors. The number is even higher for the number of foreign inventors — a 10 percentage-point increase drop is associated with a 38% increase for this group. Inventors who have worked for multinational firms appear to be most likely to respond to tax differentials.

Another study, “The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists,” finds that tax sensitivity is even greater when accounting for cross-state location of top corporate scientists in the U.S.; there is little effect on academic or government researchers.  “Overall, we conclude that state taxes have a significant effect on the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.”

Sad to say, Virginia doesn’t even rank in the list of the ten states with the largest populations of star scientists. But if we’re serious about wanting to attract corporate research here, personal tax rates are a factor that must be considered.

— JAB

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17 responses to “Taxation and the Creative Class

  1. Seems interesting, Jim but with a 9 year old chart showing gross numbers as opposed to % of population we’d probably need more info to understand. NBER synopsis doesn’t seem to add much either. What do the numbers in the chart legend (373,658 for VA) represent?

    • I agree, the map is of limited value. The paper didn’t explain it very well (or maybe I just didn’t dig deeply enough through the methodological boilerplate). I, too, would much rather see a map that showed the number of star scientists as percentage of the population.

  2. Don’t get me wrong. this is not “wealth envy” but really a practical question.

    once someone makes a LOT of money – so that all of their needs and most of their wants are satisfied – why is the tax rate such as issue?

    Warren Buffet seems to think that way as well as a few others.

    • Warren Buffet has also pressured families to sell their inherited businesses at below market prices because they needed cash to pay the federal estate tax and state inheritance taxes. If you had lived in Omaha as I did, you might not think so highly of Mr. Buffet.

      • never heard that but what does it have to do with the thing about how much money you make verses taxes paid? Buffet is not the only rich guy who has said that and I don’t think Buffer is pure as the driven snow anyhow.. he’s a businessman who loves making money… but he also has stated that once you have covered your own wants – what’s the purpose of it? He’s also limited how much he is going to leave to his kids…

        but why would Buffet “pressure” someone to sell their inherited property to pay for taxes anyhow? The stepped up capital gains rule dramatically reduces taxes on inherited property to start with, right?

        what am I missing here, TMT?

  3. ALways have to tout cheap taxes don’t you.

  4. If low taxes were the only key to economic development Silicon valley would be in Alabama or ole Miss.

  5. I really don’t understand the map.

    First of all the legend is nonsense without explanation: What does “3, 26” mean for red, or “163, 373” for light blue (including VA); it’s not a single number.

    Second, the map is counter-intuitive: it appears, for example, to indicate that NY, NJ, PA, MN, TX, CA & WA have MORE of something appealing to inventors, in sharpest contrast with WV, ME, VT, NH, AL, AR, and a block of northern Mountain states. But, what the hell, if you are an inventor, do you suppose State taxes on your income are lower in NY or NH?

    Third, your posting mentions three different studies — which one does this chart come from? I don’t have access to the source articles without paying cash for them.

  6. The only question I have is whether a 10:1 trade-off is worth the loss of revenue and the resultant decrease in services. What’s the percentage of the overall population that would be harmfully impacted by the loss in those services and is it worth it in terms of absolute people harmed versus the absolute (and absolutely smaller) amount of people retained as supreme inventors? At first blush, 10:1 spending:acquisition doesn’t seem like a great ROI.

  7. And it’s still a 9 year old chart.

    • the thing is – these days – .. when a group that supports a particular cause – puts out a “study” that “proves” their cause .. and it has caveats at the front – like :

      “While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.” – there’s good reason to not put much stock in it and especially so when it comes to business location.

      you could, for instance, take this list:

      2014 State Business Tax Climate Index

      http://taxfoundation.org/article/2014-state-business-tax-climate-inde

      and correlate it with business formation rates of start-ups and companies working off of new patents… etc… etc… and come up with a more convincing argument than just looking at one thing and putting that mega caveat at the front.

      Another thing would be to look at New York States’ return on their proposal;

      ” START-UP NY offers new and expanding businesses the opportunity to operate tax-free for 10 years on or near eligible university or college campuses in New York State.

      Partnering with these schools gives businesses direct access to advanced research laboratories, development resources and experts in key industries.”

      • I know McAuliffe is concerned about the state’s economy. I attended his bill signing ceremony (food trucks on VDOT RoW) in Tysons last month. He emphasized the loss of $9.8 billion in federal spending and the need to develop businesses that are not dependent on tax dollars. While he was short on specifics for the solutions, he understands that we cannot simply continue to hitch our wagon to Uncle Sam.

  8. the thing is – these days – .. when a group that supports a particular cause – puts out a “study” that “proves” their cause .. and it has caveats at the front – like : “While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.” – there’s good reason to not put much stock in it and especially so when it comes to business location.

    you could, for instance, take this list:

    2014 State Business Tax Climate Index

    http://taxfoundation.org/article/2014-state-business-tax-climate-inde

    and correlate it with business formation rates of start-ups and companies working off of new patents… etc… etc… and come up with a more convincing argument than just looking at one thing and putting that mega caveat at the front.

    Another thing would be to look at New York States’ return on their proposal;

    ” START-UP NY offers new and expanding businesses the opportunity to operate tax-free for 10 years on or near eligible university or college campuses in New York State.

    Partnering with these schools gives businesses direct access to advanced research laboratories, development resources and experts in key industries. ”
    http://startup.ny.gov/

  9. I am not comfortable with any think tank whose funding is not easy to ascertain.

    There’s quite a number of staff at NBER and a darth of info as to their budget and funding.

    That’s srike 1 for me.

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