Profit Taxation, R&D Spending, and Innovation

47 Pages Posted: 19 May 2022 Last revised: 29 May 2022

See all articles by Andreas Lichter

Andreas Lichter

IZA

Max Löffler

Maastricht University

Ingo E. Isphording

IZA Institute of Labor Economics

Thu-Van Nguyen

Association for the German Science

Felix Poege

Bocconi University - Department of Management and Technology; Max Planck Institute for Innovation and Competition ; IZA Institute of Labor Economics

Sebastian Siegloch

University of Mannheim - Department of Economics; IZA Institute of Labor Economics; ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research; CESifo (Center for Economic Studies and Ifo Institute); University of Cologne - Cologne Centre for Public Economics (CPE)

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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: innovation, R&D, firms, corporate taxation, patents

JEL Classification: H25, H32, O31, O32

Suggested Citation

Lichter, Andreas and Löffler, Max and Isphording, Ingo E. and Nguyen, Thu-Van and Pöge, Felix and Siegloch, Sebastian, Profit Taxation, R&D Spending, and Innovation. IZA Discussion Paper No. 14830, Available at SSRN: https://ssrn.com/abstract=4114369

Andreas Lichter (Contact Author)

IZA ( email )

No Address Available

Max Löffler

Maastricht University ( email )

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

Ingo E. Isphording

IZA Institute of Labor Economics ( email )

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

Thu-Van Nguyen

Association for the German Science ( email )

Barkhovenallee 1
Essen, 45239
United States

Felix Pöge

Bocconi University - Department of Management and Technology ( email )

Via Roentgen 1
Milan, MI 20136
Italy

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

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

IZA Institute of Labor Economics ( email )

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

ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research ( email )

United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

University of Cologne - Cologne Centre for Public Economics (CPE) ( email )

Germany

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