Can Corporate Income Tax Cuts Stimulate Innovation?

83 Pages Posted: 30 Oct 2015 Last revised: 8 Feb 2019

See all articles by Julian Atanassov

Julian Atanassov

University of Nebraska

Xiaoding Liu

Texas A&M University - Department of Finance

Date Written: February 5, 2019

Abstract

We hypothesize that corporate income taxes distort firms' incentives to innovate by reducing their pledgeable income. Using a differences-in-differences methodology, we document that large corporate income tax cuts boost corporate innovation. We find a similar but opposite effect for tax increases. Most of the change in innovation occurs two or more years after the tax change, and there's no effect before the tax change. Exploring the mechanisms, we show that tax cuts have a stronger impact on innovation for firms with weaker governance, greater financial constraints, fewer tangible assets, smaller patent stock, and a greater degree of tax avoidance.

Keywords: Taxes, Innovation, R&D, Pledgeable Income, Incentives, Patents, Patent Citations, Tax Avoidance, Financial Constraints, Corporate Governance, Productivity, Economic growth

JEL Classification: G31, G32, G34, G38

Suggested Citation

Atanassov, Julian and Liu, Xiaoding, Can Corporate Income Tax Cuts Stimulate Innovation? (February 5, 2019). Available at SSRN: https://ssrn.com/abstract=2682819 or http://dx.doi.org/10.2139/ssrn.2682819

Julian Atanassov (Contact Author)

University of Nebraska ( email )

CBA
University of Nebraska, Lincoln
Lincoln, NE 68588
United States

Xiaoding Liu

Texas A&M University - Department of Finance ( email )

Texas A&M University
College Station, TX 77843
United States

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