Corporate taxation and the quality of research and development

Ernst, Christof, Richter, Katharina and Riedel, Nadine (2014) Corporate taxation and the quality of research and development. International Tax and Public Finance, 21 (4). pp. 694-719.


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.

Item Type: Article
Keywords: corporate taxation
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation
Date Deposited: 12 Jun 2014 15:04
Last Modified: 23 Oct 2015 14:08
Funders: tbc

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