Profit Taxation, R&D Spending, and Innovation

48 Pages Posted: 15 Nov 2021

See all articles by Ingo E. Isphording

Ingo E. Isphording

IZA Institute of Labor Economics

Andreas Lichter

Heinrich Heine University Dusseldorf

Max Löffler

Maastricht University

Thu-Van Nguyen

Association for the German Science

Felix Poege

Boston University - Technology & Policy Research Initiative; Max Planck Institute for Innovation and Competition ; IZA Institute of Labor Economics

Sebastian Siegloch

ZEW – Leibniz Centre for European Economic Research

Multiple version iconThere are 3 versions of this paper

Date Written: November 1, 2021

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, Innovation, patents, R&D

JEL Classification: H25, H32, O31, O32

Suggested Citation

Isphording, Ingo E. and Lichter, Andreas and Löffler, Max and Nguyen, Thu-Van and Pöge, Felix and Siegloch, Sebastian, Profit Taxation, R&D Spending, and Innovation (November 1, 2021). CEPR Discussion Paper No. DP16702, Available at SSRN: https://ssrn.com/abstract=3960306

Ingo E. Isphording (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Andreas Lichter

Heinrich Heine University Dusseldorf ( email )

Universitätsstrasse 1
Duesseldorf, DE NRW 40225
Germany

Max Löffler

Maastricht University ( email )

P.O. Box 616
Maastricht, Limburg 6200MD
Netherlands

Thu-Van Nguyen

Association for the German Science ( email )

Barkhovenallee 1
Essen, 45239
United States

Felix Pöge

Boston University - Technology & Policy Research Initiative ( email )

Boston, MA 02215
United States

Max Planck Institute for Innovation and Competition ( email )

Marstallplatz 1
Munich, Bayern 80539
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Sebastian Siegloch

ZEW – Leibniz Centre for European Economic Research ( email )

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

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