by Joseph Coletti
Senior Fellow, Fiscal Studies, John Locke Foundation
Paul Romer won the Nobel prize in economics for showing how innovation creates economic growth. A new working paper from Raj Chetty and his colleagues presents a model of how much innovation results from tax cuts. Their model suggests tax changes “have no impact on the decisions of star inventors, who matter most for aggregate innovation…. In contrast, increasing exposure to innovation (e.g., through mentorship programs) could have substantial impacts on innovation by drawing individuals who produce high-impact inventions into the innovation pipeline.”
This does not mean marginal tax rate reductions do not produce marginal economic improvements, but innovations are not strictly marginal improvements. Low taxes and low barriers to innovation are the best government can likely do as policy. In the meantime, local communities and individual innovators can work on the best ways to show younger people the way to innovate. Interestingly, most innovations occur when a person is around 40 years old.