Number of patents increase with lower personal income tax and lower company tax according to U.S. study

The relationship and effect of corporate and personal taxes on innovation has long been studied. A comprehensive study was recently published investigating this effect in the United States in the 20th century.

Briefly, taxes do affect the amount of innovation, the quality of innovation and the location of inventive activity (Ufuk Akcigit et al., 2018).

The study considered historical patent data and inventor panel data, R&D lab data and historical tax data including personal and corporate income tax databases to draw conclusions on this relationship.

The study concluded that higher personal and corporate income taxes negatively affect the quantity, quality, and location of inventive activity at the macro and micro levels: a 1% increase in marginal tax reduces the number of patents and citations by 4%. A 1% decrease however increases the number of patents by 6%.

A significant tax increase has historically led to a significant drop in innovation levels and patent filing activities in the U.S. as illustrated in the case study for three cases: New York, Michigan and Delaware.

With the recent major tax rate cuts under the present U.S. administration, we can expect that patent activity of corporations and inventors in the U.S. will increase in the coming years.

It is of course uncertain if these conclusions can be transferred to the European scene. However, one European country does spring to mind for being known for low taxes and high patent activity: Switzerland. So possibly the relation between taxes and patents of the study applies to Europe as well.

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