Schumpeter and the taxation of innovation: when bureaucracy stifles creative destruction
For Joseph Schumpeter, innovation is the central driving force of capitalist dynamics. The entrepreneur is its key component. It is the entrepreneur who carries innovation and triggers the “creative destruction” that renders existing products and services obsolete.
But Schumpeter also foresaw a paradox : the success of innovation gives rise to monopolies, and the entrepreneur is eventually replaced by bureaucracy.
In France, this cycle is altered by the tax system. Indeed, the innovative entrepreneur no longer encounters bureaucracy at the end of the cycle, as Schumpeter predicted, but from the very first day.
The entrepreneur confronted with fiscal bureaucracy
Startups—while they are little more than ideas—bear administrative obligations that cost them, proportionally, far more than they do large companies.
There are innovation incentives, and indeed many of them exist in France. But access to these programs is protected by a thicket of administrative requirements and complex rules — consider, for example, the de minimis regulations that limit eligibility for certain schemes such as the JEI (Young Innovative Company) status.
Schumpeter identified the entrepreneur as the one who breaks with routine. Our tax system, however, confines them within formalities from the very moment they are created.
The paradox of innovation taxation
France offers generous mechanisms : the research tax credit, the innovation tax credit, and the so‑called “IP box” regime provided for in Article 238 of the French Tax Code. However, these mechanisms come with administrative burdens that are often discouraging for innovative small and medium‑sized businesses.
Take the IP box, for example. This regime is specifically designed to encourage innovation in France, notably through the nexus requirement, which in principle restricts eligibility to assets developed by the French company seeking to benefit from it. Yet its complexity discourages small firms—even when they genuinely innovate—while some large groups manage to bring pre‑existing operations within its scope.
The research tax credit (CIR) reflects the same paradox. For instance, SMEs requesting reimbursement of their credit often see this process turn into an implicit tax audit. More mature companies, which generally owe corporate tax, simply offset their CIR directly against their liability, with no administrative friction.
This fiscal complexity—and, more broadly, regulatory complexity—accelerates the formation of the monopolies predicted by Schumpeter. Large corporations, foremost among them the big tech giants, are today best equipped to absorb the administrative burden of current tax mechanisms, whether related to innovation taxation or to transfer pricing rules that apply whenever a group operates across several countries.
The innovative entrepreneur, meanwhile, struggles to keep up. Fiscal bureaucracy entrenches monopoly even before creative destruction has completed its work.
The legislator : creative destruction or destructive creation ?
In France, the hypertrophy of regulations produces unclear texts that shift with each Finance Act and generate audits and litigation.
Legal and regulatory costs weigh heavily on businesses of all sizes. A study by the European Commission even identifies this complexity as the third major barrier to investment (see source).
In Europe, beyond the tax sphere, regulatory pressure now anticipates innovation itself. The AI Act offers a striking example: the technology is not yet mature, yet it is already being regulated.
This regulatory framework risks reinforcing the monopoly of major players—mostly American groups that have thrived in the deregulated incubator of post‑Biden America—to the detriment of European startups, which are ill‑equipped to bear such an early legislative burden.
Schumpeter predicted that the innovative entrepreneur would eventually become a bureaucrat. The prophecy was accurate, but incomplete. In France, the entrepreneur becomes a bureaucrat from day one. Not by choice, but by necessity.
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