Working Paper: CEPR ID: DP16702
Authors: Andreas Lichter; Max Löffler; Ingo E. Isphording; Thuvan Nguyen; Felix Pöge; Sebastian Siegloch
Abstract: We study how profit taxation affects plants’ R&D spending and innovation activities. Relying on geocoded survey panel data which approximately covers the universe of R&D-active plants in Germany, we exploit around 7,300 changes in the municipal business tax rate over the period 1987–2013 for identification. Applying event study models, we find a negative and statistically significant effect of an increase in profit taxation on plants’ R&D spending with an implied long-run elasticity of -1.25. Reductions in R&D are particularly strong among more credit-constrained plants. In contrast, homogeneity of effects across the plant size distribution questions policy makers common practice to link targeted R&D tax incentives to plant size. We further find lagged negative effects on the (citation-weighted) number of filed patents.
Keywords: corporate taxation; firms; R&D; innovation; patents
JEL Codes: H25; H32; O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in local business tax rate (H71) | Decrease in plants' total R&D expenditures (O39) |
| Decrease in plants' total R&D expenditures (O39) | Lower innovation output (O39) |
| Increase in local business tax rate (H71) | Lower innovation output (O39) |
| Increase in local business tax rate (H71) | Decrease in R&D spending among credit-constrained plants (O39) |
| Increase in local business tax rate (H71) | No effect on outsourced R&D activities (O39) |