How Taxing Short-Term Share Profits Can Foster Innovation

If short-termism shackles innovation, how do we break the chains? Our evidence suggests that increasing capital gains taxes for investors on short-term share appreciation is one possible solution.

Research shows that myopic focus on short-term earnings hurts investments in research and development (R&D), and one key driver of this corporate myopia is the pressure from shareholders with short horizons. The issue is that short-horizon investors are likely to devote their research efforts toward forecasting quarterly profits instead of trying to understand the long-term prospects of a firm’s R&D and investment portfolio. As a result, corporate managers worry that short-horizon investors … Read more