DP16702 Profit Taxation, R&D Spending, and Innovation

Author(s): Ingo E. Isphording, Andreas Lichter, Max Löffler, Thu-Van Nguyen, Felix Poege, Sebastian Siegloch
Publication Date: November 2021
Keyword(s): Corporate taxation, firms, Innovation, patents, R&D
JEL(s): H25, H32, O31, O32
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16702

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.