Corporate Taxation and the Quality of Research and Development

29 Pages Posted: 8 Mar 2013

See all articles by Christof Ernst

Christof Ernst

ZEW – Leibniz Centre for European Economic Research

Katharina Richter

ZEW – Leibniz Centre for European Economic Research

Nadine Riedel

Oxford University CBT; University of Hohenheim

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2013

Abstract

This paper examines the impact of tax incentives on corporate research and development (R&D) activity. Traditionally, R&D tax incentives have been provided in the form of special tax allowances and tax credits. In recent years, several countries moreover reduced their income tax rates on R&D output. Previous papers have shown that all three tax instruments are effective in raising the quantity of R&D related activity. We provide evidence that, beyond this quantity effect, corporate taxation also distorts the quality of R&D projects, i.e. their innovativeness and revenue potential. Using rich data on corporate patent applications to the European patent office, we find that a low tax rate on patent income is instrumental in attracting innovative projects with a high earnings potential and innovation level. The effect is statistically significant and economically relevant and prevails in a number of sensitivity checks. R&D tax credits and tax allowances are in turn not found to exert a statistically significant impact on project quality.

Keywords: corporate taxation, research and development, micro data

JEL Classification: H300, H700, J500

Suggested Citation

Ernst, Christof and Richter, Katharina and Riedel, Nadine, Corporate Taxation and the Quality of Research and Development (February 28, 2013). CESifo Working Paper Series No. 4139, Available at SSRN: https://ssrn.com/abstract=2228631

Christof Ernst

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Katharina Richter

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Nadine Riedel (Contact Author)

Oxford University CBT ( email )

Park End Street
Oxford, Oxfordshire OX1 1HP
United Kingdom

University of Hohenheim ( email )

Stuttgart
Germany

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