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Corporate taxation and the quality of research and development

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  • Christof Ernst
  • Katharina Richter
  • Nadine Riedel

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

Suggested Citation

  • Christof Ernst & Katharina Richter & Nadine Riedel, 2014. "Corporate taxation and the quality of research and development," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 694-719, August.
    • Handle: RePEc:kap:itaxpf:v:21:y:2014:i:4:p:694-719
    DOI: 10.1007/s10797-014-9315-2
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    More about this item

    Keywords

    Corporate taxation; Research and development; Micro data; H3; H7; J5;
    All these keywords.

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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