Perhaps the single most important thing that policymakers should do to facilitate advances in innovation is to lower tax rates both for corporations and individuals. The more money that remains in the hands of the private sector, the more will be available to investors to support innovation.
Taxes and Growth
There is a strong correlation between a strong economy and low taxes. Studies by the Cato Institute and numerous others prove that the economy grows fastest when taxes are low. In an economy that is increasingly dependent on the flow and size of the capital stock, a tax system that is hostile to economic growth must be changed.
From 1776 until 1996, GDP per capita grew at the historically unprecedented rate of 458 percent. It effectively doubled every 40 years. But since 1978, the per capita growth rate in the United States has slowed considerably. That is, per capita GDP is still growing, but more slowly than ever before in U.S. history.
These facts show that expansive government programs to support innovation cannot maintain a healthy rate of growth. The ever-growing tax burden does far more harm than government intervention does good. To restore growth, including a healthy pace of innovation, we need to start with tax cuts so the private sector can fund innovation itself.