High Corporate Taxes can Spur Innovation

One solution often suggested to start growing the economy is to slash corporate taxes.  When business taxes are too high, the argument goes, businesses lay people off and scale back on their research expenses and everything stagnates.


But what if the opposite is true?


In an early October, the Pacific Northwest Magazine (part of the Sunday Seattle Times) published a story about how Boeing came to dominate the commercial jet market following the Korean War.  High taxes were one reason Boeing succeeded.  Essentially, taxes were so high, that it made a significant research and development risks much less risky.  Had taxes been lower, the risk would have been much greater, and Boeing might not have chosen to invest in jet aircraft in the way they did.

Actually, Allen, the lawyer, had discovered something very interesting about the question of whose money the company would be spending. During the Korean War, Congress had put an "excess profits tax" in effect, intended to prevent military companies from making out too well because of increased demand during a war. As it happened, the law essentially defined "excess profits" as anything above what a company had made during the peacetime period of 1946-1949. For Boeing, of course, peace had been a sock to the pocketbook; it had hardly made anything in that time. Therefore, as orders ramped up for the war, Boeing stood to face the "excess profits" tax on virtually every dollar of its profit, while a company such as Douglas, which had had its hands full rolling out propeller-driven airliners after the war, wouldn't face the higher trigger until its military sales equaled the bonanza it had made on commercial sales.

What Allen clearly saw was that now was the perfect time to plow a huge amount of company money into an audacious new development project. All of it would be a legitimate business expense, reducing the "profits" for the coming years, but so what? That was all money that would have basically gone to the government. As long as he could persuade the board that he was putting the company in a long-term position of leading the field with a jetliner, its members were unlikely to object. Yes, it was a huge gamble, but for every dollar of the dice roll, only 18 cents of it would have been Boeing's money to keep anyway.

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I'm not sure that this taxes this high are the answer to all our problems; I go back and forth on the appropriate level of business taxes. 

But this is a scenario I hadn't considered before.  High tax rates may not be a way to generate revenue for the government.  They may be a away to encourage other spending, however on innovation, research, and other risky projects.