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Title: Profit Taxation, R&D Spending, and Innovation

Author(s): Ingo E. Isphording, Andreas Lichter, Max Löffler, Thu-Van Nguyen, Felix Poege and Sebastian Siegloch

Publication Date: November 2021

Keyword(s): Corporate taxation, firms, Innovation, patents and R&D

Programme Area(s): Public Economics

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 1987â??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.

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Bibliographic Reference

Isphording, I, Lichter, A, Löffler, M, Nguyen, T, Poege, F and Siegloch, S. 2021. 'Profit Taxation, R&D Spending, and Innovation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16702