Taxing Patents Is Parasitic Policy

If you tax something, you get less of it. What is true for CO₂ emissions and alcohol consumption will, by the same logic, hold true for patents. And should Department of Commerce (DOC) officials make good on its discussion of “charging patent holders 1% to 5% of their overall patent value,” with the stated goal of “raising revenue and narrowing the government’s budget deficit” (as reported by The Wall Street Journal), innovators and consumers will be far worse off. Taxing innovation—one of the pillars of American economic growth—to help paper over a $37 trillion debt is an utterly destructive policy, a populist quick fix to red ink. Policymakers should protect patent rights, not tax away the goose’s golden eggs.

Although it may seem abstract and maddeningly theoretical, a little economic theory goes a long way toward debunking half-baked fiscal remedies. Famed economist Paul Romer’s Endogenous Growth Theory, elaborating on the Solow Growth Model, explains that technological progress—the only driver of sustained economic growth—directly results from investment in innovation, ideas, and research and development (R&D). Economic growth, in turn, yields the so-called growth dividend, mitigating the effects of deficits on government debt and shrinking the debt-to-GDP ratio. Consequently, “the logic of patents is simple,” as a Center for Strategic and International Studies report puts it, “[I]f you want more investment in risky, uncertain R&D, you must give innovators a chance to earn a profit if they succeed.”

The DOC’s proposal would recklessly deny innovators that chance, discouraging risk-taking, reducing domestic patenting, and incentivizing offshoring.

The U.S. Patent and Trademark Office already covers its operations through user fees for filing, examining, issuing, and maintaining patents—sometimes totaling more than $10,000 over a patent’s lifetime. As Hans Sauer wrote in The Washington Post, the proposed patent tax “would treat ideas as taxable property, imposing an annual charge on the very act of invention,” warning that it “would devastate innovation by punishing risk-taking in critical fields such as biotechnology, semiconductors, and artificial intelligence.”

Shrinking returns on investment (ROI)—driven by rising patent costs—would indeed deter companies from pursuing riskier ideas. For startups, whose valuations depend on patent assets to attract funding, lower ROI could prove an existential threat, stifling innovation in its nascent stage. Not to mention, larger firms capable of absorbing risk wouldn’t likely fully absorb a tax on their inputs—patents included—but would instead pass those higher costs on to consumers.

Many firms holding patents for prospective or future purposes would forgo them altogether and instead opt for publication to protect their innovations tax-free. The tax would also make the U.S. an outlier, driving patenting offshore—an effect documented by NBER researchers.

Regardless of the method, firms would divert more time and resources toward avoiding or mitigating the tax instead of focusing on innovation and development—an entirely avoidable misallocation of capital. Moreover, patent valuation itself is notoriously speculative, raising questions of who will determine a patent’s value, at what stage, and by what methodology. The only certainties are more bureaucracy, higher administrative costs, and longer approval backlogs. Any patent tax would also likely face constitutional challenges as a direct tax on personal property without apportionment.

Beyond the proposal’s impracticalities and legal vulnerabilities, its underlying (lack of) logic is its worst shortcoming. Proposing to tax patents is more than counterproductive—it is parasitic. It undermines the very source of future GDP growth, on which the government’s fiscal health depends, revealing a willingness to rob the present and future for dubious gain. Policymakers must reject this terrible proposal and instead affirm their commitment to protecting patent rights. They should also move beyond current shutdown antics and agree on a sustainable fiscal plan that would cut red tape and reassure businesses and inventors that the U.S. is the best place to do business. America should reward its innovators, not punish them with nonsensical and parasitic taxes.