Taxes, innovation, and value

Everything that follows is even more provisional than usual…

Krugman has a good piece making the case for much higher income taxes for the very rich. John Cochrane has a rebuttal. He points to this paper by Charles Jones on innovation and top tax rates:

When the creation of ideas is the ultimate source of economic growth, this force sharply constrains both revenue-maximizing and welfare-maximizing top tax rates. For example, for extreme parameter values, maximizing the welfare of the middle class requires a negative top tax rate: the higher income that results from the subsidy to innovation more than makes up for the lost redistribution. More generally, the calibrated model suggests that incorporating ideas and economic growth cuts the optimal top marginal tax rate substantially relative to the basic Saez calculation

I haven’t looked at the paper closely, hence the caveat at the top. I’ve posted about taxes and innovation here, and about taxes and growth here.

Anyway, my quick thought reading these posts and the abstract and summary of Jones’ paper is that we perhaps spend too little effort distinguishing innovative activities from everything else. This idea is discussed in Mariana Mazzucato’s The Value of Everything, which I just started. Here’s a bit from one review:

When value extraction is masquerading as value creation, we can end up praising and rewarding non-productive activities while ignoring productive sectors. As a result, GDP rises although an economy does not make anything new and people do not feel better off. Prosperity is thus concentrated in the hands of the rich few, and inequality tends to rise. If it is a value creator that deserves a higher proportion of national income, it is now time to reopen the debate about the ‘value of everything’.

In the same vein, here’s what I wrote in a post last year:

When we talk about “creating value” in this context, it’s not just about financial value; it’s really shorthand for organizing resources in a useful way to achieve some social goal. An organization’s mission is supposed to be the ambition; profits are supposed to be the incentive; and, at least in a competitive market, innovation is the way you get it done.

Meanwhile, keeping capital gains taxes low, for instance, is a pretty inefficient way to encourage innovation.

All of which is to say, we can argue about the ideal optimal top tax rate. But what if we did a better job making it profitable to innovate and not profitable to do things that don’t create actual social value — or even destroy it? And yes, tax avoidance is a thing. So putting all of this on tax policy is probably a bad idea. But in our broader economic policy discussions, we could do a better job of differentiating what adds value and what doesn’t.