sign, bright future, Toby Elwin, blog, innovation, tax

How do you measure innovation: tax revenue

Toby Elwin, measure, economic, growth, tax revenue

Nice future, but when do we get there?

When we talk innovation, innovation is usually connected to a firm or a region.  Interest with innovation at the regional level is usually couched in economic development.

So, what is economic development other than politicians, ribbon-cutting ceremonies, and glad-handing photo-ops?

Why are so many incentive packages being offered?  Tax havens being offered?  Tax holidays?

Who do they benefit?  How are these policies and programs measured for success?  Where are their success measurements?

There is only 1 performance measure for regional development success:  tax revenue.

From a policy perspective building a cluster, special economic zone, technology or innovation courtship a tax revenue performance measure is terribly easy to remember:   tax revenue minus projected revenue of tax concessions.

Tax revenue is an easy performance measure to track and easy to comprehend: has tax revenue increased or has tax revenue decreased. It seems simple enough, however, the first difficulty in this tax revenue this assessment: data transparency and an accurate assessment needs all tax revenue sources:

  • value added tax
  • individual income tax
  • payroll tax
  • corporate income tax
  • property tax
  • sales tax
  • excise,
  • amongst others

Whoa, increased tax revenues. Great. But how long do we have to wait to reap the rewards of policy success? This is a second area that any tax revenue formula needs: time.  Success is not simply the net positive, but must account for the value to reach and sustain positive tax revenue. Anyone declaring success needs to identify how long it took to have a positive tax revenue. When you add time to the equation let’s now see how each principle values time differently:

  1. The population
  2. The politician
  3. The private enterprise

Net tax revenue increase in 1 year? 5 years? 10 years? The success criteria for the population, the politician, and the private enterprise are not aligned.

The goal for the population: quality of life

The goal for the politician: reelection

The goal for the private enterprise: return on investment

The competing actors read the numbers from their needs, such as a politician’s reelection cycle is of little help to the population in and around the region. The population is looking for help now.  Social services, job opportunities, improved infrastructure, education, and health care. This is their social contract with government.  2 different time horizons.

Each and every tax holiday or tax concession that politicians and policy makers give, takes funding away from schools, hospitals, infrastructure, and jobs. So, immediate, within the year, is a difficult time-frame to measure economic development success of the opportunity cost. However, food on the table and jobs to buy that food are a population’s immediate need.

The politician is looking to get reelected. Whatever promises were made to the public to buy-in to the politician’s vision of a better future in exchange for their vote may no longer apply to the reality of their policy for economic development. Their tax holiday proposals look good in today’s newspaper: total foreign direct investment, capital planning projects, new jobs created these are all forward projections, they are all pro forma and the politician uses these numbers to get himself reelected.

A politician’s time-frame of success is 1-2 years, enough time to publicly draw attention to their ability and feed that information into their reelection or their party’s reelection. Though little can result in 1 – 2 years this does not stop politicians from touting a cumulative valued of all verbal deals as a measure of their success to draw investment. Can tax revenue increase within 1 – 3 years enough to offset the tax revenue lost enticing private enterprise?

The private enterprise is looking at a positive cash flow from their investment. Public policy and politically granted tax holidays or tax-free zones are part of a private enterprise valuation model and capital planning formula for projected returns. Presumably any investment is looking to get a positive return as early as possible.

Regional incentives that tout quality of workforce, infrastructure development, and market access are all policy promises made to attract companies, but none will guarantee a company stays if offered a better deal across the border, timezone, or continent. The time-frame for private enterprise success is anywhere from quarterly progress tracking to 5 years.

Be wary of those who make claims of economic zone success or failure. From my perspective, only a population can stamp an “OK” on success. Policy makers and private enterprise need to show the population new schools built, new hospitals built, expanded health services, increased emergency services, improved infrastructure, higher paying jobs they are now working at, not what is believed to happen, but has happened.

No doubt I got some things wrong, or left out some important ideas.  Please let me know what you think and suggestions you have for me to add value.

No doubt I got some things wrong, or left out some important ideas.  Please let me know what you think and suggestions you have for me to add value.

Further insight:

  1. Case study:  What can we learn from Europe’s most successful cluster?
  2. Deconstructing Clusters- Chaotic Concept or Policy Panacea
  3. Where is the Value Added In the Cluster Approach?
  4. Can Regional Clusters be Engineered?
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Comments 2

  1. Giving something away to get something in the future challenges the immediate payoff and the easiest calculations. The element of time is so important, by giving up tax concessions now, the policy maker is selling the voters on a future return.

    That the policy maker, the business, and the population all have different degrees of success and the time they need to realize their success causes the rub. They hopefully elect officials that represent their best interests.

    That the way it is on paper, but as you point out quite succinctly, not all countries have or can do it.

    Thanks for the comment Mouli, please join in more often.

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