Innovation and Entrepreneurship Research

Profit Taxation, R&D Spending, and Innovation

Lichter, Andreas; Loeffler, Max; Isphording, Ingo E.; Nguyen, Thu-Van; Poege, Felix; Siegloch, Sebastian (2021). Profit Taxation, R&D Spending, and InnovationIZA Discussion Paper 14830.

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.


Also published as: CEPR Discussion Paper 16702

Also published as:ZEW Discussion Paper Nr. 21-080