With immigration being a flashpoint in American politics one may wonder how tax law affects foreign inventors who locate to the United States, particularly “superstar” innovators who publish on average more than 29 patents (and receive a maximum of 100 citations per patent or more).
Since the 1970s there has been negative correlation between the top tax rate and the share of top quality foreign inventors who locate in a country, as well as the share of top quality domestic inventors who remain in their home country.
To amplify the importance of these preceding statements consider the following:
The most prolific and famous inventors in U.S. history, including Alexander Graham Bell, inventor of the telephone and Ralph Baer, the inventor of the first home video gaming console, were immigrants.
Recent studies show that Inventors seem to be more mobile than the general population. At least 2.3% of inventors move at least once over their lifetime in and 4.6% of the superstar inventors move over the same duration.
Interestingly, for example, Russian inventors (relative to lower quality Russian inventors) tended to migrate to lower top tax countries after the Soviet Union collapsed.
Inventors who have worked for multinationals are more likely to take advantage of tax differentials, possibly because working for a multinational makes a move abroad easier and grants the inventor international exposure. On the other hand, inventors whose company has a research activity that is highly concentrated in a given country are less sensitive to tax differentials in that country, presumably because career concerns (being located where the company’s main research activity is) outweigh tax considerations.
The results highlight that superstar top 1% inventors are significantly affected by top tax rates when deciding where to live. Given a ten percentage point decrease in top tax rates, the average country would be able to retain 1% more domestic superstar inventors and attract 38% more foreign superstar inventors.
So where does that leave tax policy in the U.S.?
The right answer need not necessarily be to tax less and abandon all concerns for redistribution. Instead, it may be worth considering international tax cooperation and harmonization.
However, all domestic (and foreign inventors planning to immigrate to the United States) should be ecstatic about the recent U.S. policy decision to suspend the medical device tax for two years, a development that may affect other industry sectors in the future, too.
73 percent of pre-revenue companies surveyed recently suggest that the suspension has improved the climate for raising capital and funding.