Innovation

Carly Fiorina, who is currently advising the McCain campaign, shares McCains preference for tax cuts as a way of stimulating the economy. According to her, tax cuts are the only way to stimulate innovation. Granting that this statement is to some degree hyperbole, how true is it?

Well, what happens when you cut taxes? (I'm talking at the corporate level, not the taxing authority). The company has more money to do things with -- to pay people, buy equipment, try things. I started to say that it can keep prices of its products lower than would otherwise be the case, but upon reflection, I don't think thats true -- the amount of money you make per unit of product sold would be affected (less per unit), so the amount of money you put into the corporate treasury would be less, but thats a result, not a driver.

Paying people more might result in more innovation, in that you can either motivate people more or hire a more expensive class of people -- ones who presumably would be more innovative. I don't think that just paying them more would do it, but it might; similarly, hiring more innovative people might do it, but its not a guarantee.

Buying more equipment, particularly if its equipment that can be used to innovate, might do it. If you're working in a field that requires specialized equipment, and now you can buy equipment that before you could not, that might make the level of innovation higher.

Trying new things -- having the money to throw at a problem, whatever that translates out to in practice -- might affect the level of innovation, and my guess is that of these three its the most likely. Innovation isn't just cerebral, as a rule -- you have to try things.

So is she right? Will it stimulate innovation to have a tax cut? Yeah, I think she is. Does that mean its a good thing to do? I think not, for two reasons.

One is, a tax cut is a broad method of approaching the question. You're cutting taxes for twenty thousand organizations, but not all of them will take it and put it toward innovation - promoting activity, just as many people are not taking their stimulus checks to the mall. You're hoping that some subset of them will do it, though, and that some subset of them will generate additional innovation.
Second, you're betting that the increase in revenue as a result of innovation will be greater than the revenue you've lost by the cut. Is that possible? Yes. Is it likely? I think it takes a leap of faith. Sometimes leaps of faith are justified. Sometimes, not.

So what does stimulate innovation? I have a couple of ideas, but I'd like to see if anyone has any they'd like to mention.