Corporate Taxation and the Quality of Research and Development

33 Pages Posted: 15 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: 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 (patent boxes). 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 signi ficant 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, patent quality, micro data

JEL Classification: H3, H7, J5

Suggested Citation

Ernst, Christof and Richter, Katharina and Riedel, Nadine, Corporate Taxation and the Quality of Research and Development (2013). ZEW - Centre for European Economic Research Discussion Paper No. 13-010. Available at SSRN: https://ssrn.com/abstract=2233464 or http://dx.doi.org/10.2139/ssrn.2233464

Christof Ernst (Contact Author)

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

Oxford University CBT ( email )

Park End Street
Oxford, Oxfordshire OX1 1HP
United Kingdom

University of Hohenheim ( email )

Stuttgart
Germany

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