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Corporate taxation and the quality of research and development

Christof Ernst, Katharina Richter and Nadine Riedel ()

No 66-2013, FZID Discussion Papers from University of Hohenheim, Center for Research on Innovation and Services (FZID)

Abstract: This paper examines the impact of tax incentives on corporate research and development (R&D) activity. Traditionally, R&D tax incentives have been provided in the form of special tax allowances and tax credits. In recent years, several countries moreover reduced their income tax rates on R&D output. Previous papers have shown that all three tax instruments are effective in raising the quantity of R&D related activity. We provide evidence that, beyond this quantity effect, corporate taxation also distorts the quality of R&D projects, i.e. their innovativeness and revenue potential. Using rich data on corporate patent applications to the European patent office, we find that a low tax rate on patent income is instrumental in attracting innovative projects with a high earnings potential and innovation level. The effect is statistically significant and economically relevant and prevails in a number of sensitivity checks. R&D tax credits and tax allowances are in turn not found to exert a statistically significant impact on project quality.

Keywords: corporate taxation; research and development; micro data (search for similar items in EconPapers)
JEL-codes: H3 H7 J5 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-acc, nep-eur, nep-ino, nep-ipr, nep-pr~, nep-knm, nep-pbe, nep-ppm, nep-pub and nep-tid
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Related works:
Journal Article: Corporate taxation and the quality of research and development (2014) Downloads
Working Paper: Corporate taxation and the quality of research and development (2013) Downloads
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