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Discussion Papers
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 InnovationCEPR Discussion Paper 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 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.

https://cepr.org/publications/dp16702

Alsopublished as: ZEW Discussion Paper Nr. 21-080

Also published as: IZA Discussion Paper, 14830