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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. 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.

Suggested Citation

  • Christof Ernst & Katharina Richter & Nadine Riedel, 2013. "Corporate Taxation and the Quality of Research and Development," CESifo Working Paper Series 4139, CESifo.
    • Handle: RePEc:ces:ceswps:_4139
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    corporate taxation; research and development; micro data;
    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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