The barriers to innovation that companies face are fairly well understood. Apart from the theoretical underpinnings, there’s another more practical reason as well: innovation costs money. A new business’s (or business segment’s) cash curve usually looks something like this:
So for an idea to be attractive, it has to generate positive cashflow. In a corporate setting, that positive cash flow has to be foreseeable. New entrepreneurial companies have a bit more leeway to burn investor money in speculative ventures–see also “Venture Capital, business model of.” But not a lot–they still have to produce returns.
Taxes on businesses–cap gains, personal income, etc etc–raise the hurdle rate that companies consider when making new investments. The higher the return that they have to realize, the less likely they are to invest in any but the most surefire business ideas. The less likely they are to invest in speculative ideas, the fewer speculative ideas get funded. This prevents people from attempting to do innovative things, within or outside of companies. The fewer things that get tried, the fewer succeed, and we have fewer new technologies. Raising the necessary rate of return on investments means fewer investments are made.
It’s a simple effect of a normal distribution of innovation success. A smaller sample size means smaller numbers of winners. Increased taxes reduce the incentives for those winners to try, or, in a corporate setting, even get a shot at the title as profitability pressures crush the intrapreneurial spirit.
Critics will say “show me the numbers.” Well, I don’t have time to write a doctoral thesis on this, but you’d want to look at:
1) Tax rates by entity type by year
2) Patents granted by year
3) # companies started per year
4) # IPOs/year
Etc., etc. I’m not even exactly sure how you’d measure innovation, and that’s part of the problem. We don’t even know what we’re missing out on. Friedrich Hayek posited that the fundamental advantage of a liberal (classical liberal, folks) society is that it is the closest thing that we have as an answer to the knowledge problem–the issue that knowledge is dispersed and freedom is the only way to capitalize on each individual’s unique talents and discoveries. Attempts to optimize life from a central planning perspective assumes that humanity already has the answers, which it doesn’t. And taxation, by its redistributive nature and its uses for non-market ends, is a tool of central planning. QED.
Expect to see less innovation across all areas as taxes go up at the end of this year. Or any year.
Falling Outside the Normal Moral Constraints 