Tax Reform Can Diminish Innovation Gap
An important new study led by Stanford economist Raj Chetty and published by the Equality of Opportunity Project sheds light on some of the key factors holding back U.S. innovation. Previous analyses focused on the direct relationship between national and state policies and innovation, but this project’s study follows individuals from childhood to adulthood, examining factors that predict inventive activity from an early age.
For a large segment of children, researchers find an expected pattern: higher math test scores from an early age predicted inventive activity in later years. Surprisingly, this association does not hold for low-income students; high-scoring children in poverty are just as unlikely to file patents later in life as low-scoring children.
In addition to family income, geography plays a particularly important role. Children across the income spectrum are more likely to propose inventions if they live in a city that has a critical threshold of other innovators. This finding holds true even when separating innovation into specific types, suggesting that access to specific networks that emerge in densely populated areas is crucial.
Smart children trapped in the outer reaches of a metropolitan area are less able to tap into the groups and resources available in urban areas. Poverty introduces an additional constraint in the equation reducing the likelihood that young people make regular trips to a city. The research implies that if children lived in a better socioeconomic condition and closer to the city center, more innovation would follow.
Like any other groundbreaking study, the results are being used to reinforce political narratives in some bizarre ways. Take, for example, Vox’s write-up of the research by Matthew Yglesias. To Yglesias, the study’s results are evidence that a small-government philosophy of spending restraint and tax cuts is antithetical to innovation. If innovation is being held back by poverty and distance, cutting corporate and individual tax rates are unlikely to be an elixir for inventiveness. Yglesias concludes that assisting low-income high-scorers would, “cost money — the exact opposite of the philosophy that emphasizes tax cuts and small government as the key to unlocking innovation and growth.”
That assumes federal and state programs to target young high-achievers are effective. Many do not bear fruit. Policymakers across the country have secured funding for STEM schools, mainly at the middle and high school levels. Despite the economy’s need for more STEM positions to be filled, research does not generally support the idea that giving math- and science-gifted students a place to expand their knowledge and research acumen is effective.
Studies controlling for student characteristics fail to show notable advancement at these schools, including performance on high-stakes tests critical for college placement. Attempts by lawmakers to pay for the college tuition of underprivileged teenagers often backfire, as universities respond by raising tuition. This idea, known as the Bennett hypothesis, has been confirmed in recent analyses with high-quality data.
However, in confronting income and geography as barriers to innovation, we need not be pessimistic. Reducing the tax deductibility of mortgage interest and property taxes, as does the new tax bill, can make housing more affordable in all of America’s major cities. Lowering living costs across densely-populated areas would allow low-income families to have access to many of the “network” advantages that come with living in cities.
Additionally, comprehensive tax reform can increase innovation through multiple avenues. As the Taxpayers Protection Alliance (TPA) has previously shown, lower individual and corporate tax rates result in more patent-filing activity. Contradicting Yglesias, evidence shows that inventive people and businesses respond mightily to incentives. Innovation does not come with a simple on-and-off switch.
There is no instant panacea, private or public, for an inventiveness gap that spans wide distances and affects people across the income spectrum. But tax and regulatory reform can help gifted children take part in game-changing projects that keep America moving forward. Poorly-targeted government initiatives will only ensure that the innovation gap grows wider, as taxpayers bear the brunt of failed promises.
Ross Marchand is a policy analyst at the Taxpayers Protection Alliance
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