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Higher Profit Taxes Reduce Firms' R&D Activities

Siegloch, Sebastian; Poege, Felix; Nguyen, Thu-Van; Löffler, Max; Lichter, Andreas; Isphording, Ingo E. (2021). Higher Profit Taxes Reduce Firms' R&D Activities, Vox EU Column 2021 21.12.2021.

Studies have shown that targeted R&D tax incentives – such as tax credits for R&D spending – induce firms to conduct more R&D. However, little is known about the effects of general profit taxes on firm-level R&D spending and innovation output. This column presents evidence from Germany that points to sizeable negative effects of increasing profit taxes on firms’ R&D spending and patents. However, slashing business tax rates may not be the most efficient policy instrument to spur innovation altogether.