As regular readers know, I’m a fan of Felix Salmon. But I’m not so sure about his latest post on confiscatory taxes:

[The post in question was written by Justin Fox, the editorial director of the Harvard Business Review Group. I am also a fan of Justin, and I apologize for the confusion!]

Boeing was mostly a military contractor in those days (Lockheed and Douglas dominated the passenger-plane business), and had made hardly any money at all from 1946 to 1949. So pretty much any profits it earned during the Korean conflict were by definition excess, and its effective tax rate in 1951 was going to be 82%. This was unfair and anti-business. If similar legislation were enacted today, you could expect U.S. Chamber of Commerce members tomarch on Washington and overturn cars on the streets.
It being 1951, Boeing instead sucked it up and let the tax incentives inadvertently devised by Congress steer it toward a bold and fateful decision. CEO Bill Allen decided, and was able to persuade Boeing’s board, to plow all those profits and more into developing what became the 707, a company-defining and world-changing innovation. Writes Verhovek:
Yes, it was a huge gamble, but for every dollar of the dice roll, only eighteen cents of it would have been Boeing’s to keep anyway. For Douglas and Lockheed, both in a much lower tax bracket, that was not so easy a call.
So that’s it! High tax rates—confiscatory tax rates—spur innovation! Well, at least once in a blue moon they do. Which is an indication that there might be some important stuff missing from the classic economists’ view of taxation, as summed up by Greg Mankiw a few weeks ago.

My understanding is that in the era of confiscatory taxes, many firms offered lavish fringe benefits — the firm will provide an automobile, housing, etc. — in lieu of cash compensation. I haven’t read the book in question, but it’s hardly surprising that a firm like Boeing would, under the circumstances, plow more money into exotic R&D projects. The incentive for bigness in those days was quite strong: only big firms had the scale to offer the most lavish fringe benefits, and the lawyers skilled in the art of tax avoidance. But of course there are benefits to living in a world of smaller, nimbler firms that focus on ground-level innovation rather than basic R&D.

Alexander Field famously argued that the 1930s were the most technologically progressive decade. But I’d hardly describe it as a particularly happy or prosperous time in our history. Innovation in our own era tends to be incremental, user-led, and ground-level. It is driven by venturesome consumers rather than large business enterprises, and this might reflect increases in disposable income over time.

Not sure I want to roll the dice on embracing a confiscatory tax regime that reduces disposable income in the hope that firms will try dodging confiscatory taxes by plowing money into big R&D projects that might not pan out.

But again, I haven’t read the book and there’s a pretty good chance I’m missing something important, so take this with an extra heaping of salt.