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Corporate taxation and the quality of research and development

Christof Ernst, Katharina Richter and Nadine Riedel ()

International Tax and Public Finance, 2014, vol. 21, issue 4, 694-719

Abstract: This paper examines the impact of tax incentives on corporate research and development (R&D) activity. R&D tax incentives are commonly provided as special tax allowances or tax credits. In recent years, several countries also reduced their income tax rates on R&D output with the purpose to foster R&D activity. Previous papers have shown that all three tax instruments are effective in raising the quantity of R&D related activity. We in turn assess the impact of corporate tax incentives on the quality of R&D projects, i.e., their innovativeness and earnings potential. Using rich data on corporate patent applications to the European patent office, we find that a low tax rate on patent income raises the average profitability and innovation level of the projects undertaken in a country. The effect is statistically significant and economically relevant and prevails in a number of sensitivity checks. Generous R&D tax credits and tax allowances are in contrast found to exert a negative impact on project quality. Copyright Springer Science+Business Media New York 2014

Keywords: Corporate taxation; Research and development; Micro data; H3; H7; J5 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Corporate taxation and the quality of research and development (2013) Downloads
Working Paper: Corporate taxation and the quality of research and development (2013) Downloads
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DOI: 10.1007/s10797-014-9315-2

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