Can Corporate Income Tax Cuts Stimulate Innovation?

Julian Atanassov and Xiaoding Liu

Journal of Financial and Quantitative Analysis, 2020, vol. 55, issue 5, 1415-1465

Abstract: We hypothesize that corporate income taxes distort firms’ incentives to innovate by reducing their pledgeable income. Using a differences-in-differences methodology, we document that large corporate income tax cuts boost corporate innovation. We find a similar but opposite effect for tax increases. Most of the change in innovation occurs 2 or more years after the tax change, and there’s no effect before the tax change. Exploring the mechanisms, we show that tax cuts have a stronger impact on innovation for firms with weaker governance, greater financial constraints, fewer tangible assets, smaller patent stock, and a greater degree of tax avoidance.

Date: 2020
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