Corporate Taxation and the Quality of Research & Development

Ernst, Christof, Richter, Katharina and Riedel, Nadine (2013) Corporate Taxation and the Quality of Research & Development. Centre for Business Taxation WP 13/01.

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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 signifcant 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 signifcant impact on project quality.

Item Type: Other Working Paper
Keywords: corporate taxation, research and development, micro data
Centre: Oxford University Centre for Business Taxation > CBT Working Papers
Date Deposited: 20 Mar 2013 15:22
Last Modified: 09 Sep 2016 15:30

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