Higher Taxes, Higher Profits?

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Does lowering corporate taxes promote investment, technological innovation, and national competitiveness? Sounds reasonable, but there's evidence that sometimes raising taxes can also work, in this Washington Post review of Sam Howe Verhoevek's Jet Age:

U.S. manufacturers tried to catch up [with the de Havilland Comet], but two years went by before airline passengers could board an American-made jet, the Boeing 707, which was developed under unusual circumstances. In the 1950s, Congress enacted an excess profits tax "intended to prevent military companies from making out too well because of increased demand during [the Korean War]." Under the new system, Boeing would have ended up giving 82 cents on every dollar of profit to the government. Seeing an opportunity for both a deep investment and a tax deduction, Boeing's president, Bill Allen, called for the development of the 707 and allotted $15 million to the project - nearly a quarter of the company's net worth.

While the Comet was the first jetliner to take to the skies, the 707 turned out to be the better-designed plane. A fatal flaw with the Comet's square windows caused three of the jets to lose cabin pressure and explode in mid-flight. The success of the 707, meanwhile, transformed Boeing. Before the "jet age" the company had less than 1 percent of the market share, and now it is one of the leading manufacturers in the world. As Verhovek points out, the president of the United States flies on a Boeing jet.

I can't point to any immediate candidate for this treatment now, and I'm not claiming that high marginal taxes are good in themselves. However, Boeing's creative response does call to mind one of the more provocative recent findings of social science, as reported recently by the Wall Street Journal, that there's an optimal amount of adversity:

[P]eople who had experienced a few adverse events in their lives reported better mental health and well being than people with a history of frequent adversity and people with no history of misfortune.

Nations with crushing tax loads have not generally excelled, but major advances somehow happened when U.S. income taxes were much more severe than they have been. Not only jet aircraft but television, the Salk polio vaccine, and the Xerox photocopier were developed in decades with marginal tax rates far higher than ours, as I've already observed here about achievement in the arts. U.S. inventors could do surprisingly well in the 1950s and 1960s thanks to capital gains treatment on licenses under some conditions -- a feature of the I.R.S. code I discovered when researching the Hungarian-born reclining chair inventor Anton Lorenz, who had homes in Greenwich, CT and the Palm Beach area bought from his deals with Barcalounger and other companies. Another furniture entrepreneur once explained to me that Swedes, Danes, and Norwegians lead in ergonomic chair design partly because the high rate of corporate and personal taxes in Scandinavia creates incentives to spend money on more attractive and healthier work environments.

We should consider that taxes can sometimes have positively paradoxical consequences -- especially if international competitors experience negative unintended ones. The trick is to make the burden a challenge.

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Edward Tenner is a historian of technology and culture, and an affiliate of the Center for Arts and Cultural Policy at Princeton's Woodrow Wilson School. He was a founding advisor of Smithsonian's Lemelson Center.

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