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Taxation and Innovation

Author

Listed:
  • Oliver Falck
  • Anna Kerkhof
  • Christian Pfaffl

Abstract

Innovations form the basis for technological progress and have a decisive influence on the future viability of economies. However, positive externalities as well as the inherent risk of investments in research and development (R&D) lead to private-sector investments in R&D being below the efficient level in the market equilibrium. The state can compensate for this market failure by providing incentives for innovation. Various tax policy instruments are available for this purpose: A distinction is made between targeted R&D tax subsidies (input- or output-based) and general tax subsidies via corporate and income taxation. In an evidence report with meta-analysis, the existing literature on the effect of tax subsidies for R&D was systematically evaluated. The analysis paints a predominantly positive picture with regard to the desired effectiveness of R&D tax promotion. In particular, targeted, input-based R&D tax subsidies and general support through corporate taxes show a positive effect on innovations and R&D activities in private-sector companies.

Suggested Citation

  • Oliver Falck & Anna Kerkhof & Christian Pfaffl, 2021. "Taxation and Innovation," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 123.
    • Handle: RePEc:ces:ifofob:123
    as

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    References listed on IDEAS

    as
    1. Schwab, Thomas & Todtenhaupt, Maximilian, 2021. "Thinking outside the box: The cross-border effect of tax cuts on R&D," Journal of Public Economics, Elsevier, vol. 204(C).
    2. Shao, Yuchen & Xiao, Chengrui, 2019. "Corporate tax policy and heterogeneous firm innovation: Evidence from a developing country," Journal of Comparative Economics, Elsevier, vol. 47(2), pages 470-486.
    3. Rao, Nirupama, 2016. "Do tax credits stimulate R&D spending? The effect of the R&D tax credit in its first decade," Journal of Public Economics, Elsevier, vol. 140(C), pages 1-12.
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