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Corporate taxation and the quality of research and development

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  • Ernst, Christof
  • Richter, Katharina
  • Riedel, Nadine

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. --

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Bibliographic Info

Paper provided by University of Hohenheim, Center for Research on Innovation and Services (FZID) in its series FZID Discussion Papers with number 66-2013.

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Date of creation: 2013
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Handle: RePEc:zbw:fziddp:662013

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Keywords: corporate taxation; research and development; micro data;

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  1. Johannes Becker & Clemens Fuest, 2007. "Quality versus Quantity – The Composition Effect of Corporate Taxation on Foreign Direct Investment," CESifo Working Paper Series 2126, CESifo Group Munich.
  2. Laura Abramovsky & Rachel Griffith & Gareth Macartney & Helen Miller, 2008. "The location of innovative activity in Europe," IFS Working Papers, Institute for Fiscal Studies W08/10, Institute for Fiscal Studies.
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Cited by:
  1. Nick Pantaleo & Finn Poschmann & Scott Wilkie, 2013. "Improving the Tax Treatment of Intellectual Property Income in Canada," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 379, April.

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