Discussion paper

DP16702 Profit Taxation, R&D Spending, and Innovation

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.


Lichter, A, M Löffler, I Isphording, T Nguyen, F Poege and S Siegloch (2021), ‘DP16702 Profit Taxation, R&D Spending, and Innovation‘, CEPR Discussion Paper No. 16702. CEPR Press, Paris & London. https://cepr.org/publications/dp16702