Want an Innovative “Knowledge Economy”? Cut Taxes.


In Rhode Island, lately, we’ve been hearing frequently about the need to use targeted programs for economic development and to make the state cooler (in progressives’ tastes) in order to attract and keep Millennials.  To those of us of a free-market bent, such strategies seem intuitively wrongheaded, and indicative mainly of a desire for insiders to keep and expand their power.

Economists Enrico Moretti and Daniel Wilson have published an interesting paper available through the National Bureau of Economic Research that relates to this question.  The upshot is this:  “Star scientists,” defined as those who file the most patents, are very sensitive to changes in tax rates (in large part because they tend to be very wealthy).  A state that wants to increase their number (and, obviously, the business enterprises in which they operate) should decrease the taxes on them.

Specifically, the study finds that for every 1% increase in the personal income that a state allows the scientists to keep, it would see a 1.6% increase in the number of scientists choosing to locate there in the long run.  Because the equation goes both ways, another 1.6% of scientists who would otherwise have left will remain, for a net increase of 3.2%.  If corporate income taxes have a wage component when calculating the percentage for the particular state, the effect is even greater, and wages make up one-third of the calculation for apportioning the tax in Rhode Island.  (Note that this changed in Rhode Island law as of January of this year.)

As locals who proclaim Rhode Island’s “quality of life” frequently suggest, the study’s authors acknowledge that other factors play a greater role in choosing to locate, such as livability and the presence of other innovators and investors, but this is about the change in the number and, more importantly, Rhode Island is arguably doing much worse than it should be currently.

According to a table in the study’s appendix, as of 2006, Rhode Island was well behind every other New England state — and the entire Northeast — in its number of star scientists, except for Maine.  Rhode Island’s 33 stars compared with Massachusetts’s 645.

Adjusting the rankings for population moves Rhode Island above much of the rest of the country, but (again, excepting Maine), the Ocean State outperformed no state north of Maryland or east of Indiana.  Rhode Island had 15 stars for every half-million residents, but Massachusetts had 50, and Vermont led the list with 131.

In other words, our “quality of life” and prime location are not doing it for our state, and there’s no reason to think the central-planning-style programs favored by our governing elite will do the trick turning things around.  (It only makes matters worse when the governor’s plan for doing better on basics like road maintenance is built on a grab for more money.)

The flaw in targeted programs is that they assume politicians and bureaucrats can pick the scientists and others to whom to offer the special deals.  The first problem with this approach is that, while the state may attract its 1.6% of new scientists (for example), it would likely still lose the 1.6% who were on the verge of leaving.  State functionaries aren’t well positioned to know which 1.6% is going to be more successful.

The second problem is that any considerations that politicians and bureaucrats use to pick their winners are separate from their likelihood of success.  That not only makes the entire system less efficient (because the state is using biased criteria for its gambles), but it also redirects resources away from the economic development (because money and effort that would have gone into the economy go instead to buying off or otherwise satisfying special interests).

One should stress, too, that these principles apply across the economic spectrum, not just to the top performers.  Not only do middle-income earners make decisions based on relative tax burdens, but they also may become higher-income earners and, most important, go where they have the opportunity to make that transition.  Special tax deals or marginal tax cuts might help that up-and-comer once he or she has made it, but they don’t help get there.

Not to repeat an oft-stated truism, but what Rhode Island needs to do is make substantial broad-based cuts to the cost of living here, and the government can do that most directly by cutting taxes.

  • Dave Fraser

    Excellent commentary, as always. I wonder what tends to make Vermont have almost 10 times more (per capita) “star scientists” than RI?????

    • OceanStateCurrent

      That is an interesting question. Population is some of it. It’s only 5 times RI in absolute numbers. My first guess would be Vermont’s status as a get-away location for people who want to be in the orbit of New York City, but there may be some unique circumstance in law (e.g., stronger patent laws or something), geography, or historical coincidence.

  • ShannonEntropy

    As my granny used to say … All accents sound alike in the dark

    That made NO Sense … but then again … she was always stoned