Profit Taxation, R&D Spending, and Innovation

Andreas Lichter; Max Löffler; Ingo E. Isphording; Thu-Van Nguyen; Felix Poege; Sebastian Siegloch

doi:10.1257/pol.20220580

Profit Taxation, R&D Spending, and Innovation

Andreas Lichter, Max Löffler, Ingo E. Isphording, Thu-Van Nguyen, Felix Poege, Sebastian Siegloch

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Abstract

We study how profit taxes affect establishments’ R&D activities. Relying on detailed panel data of R&D-active firms in Germany over two decades, we exploit identifying variation induced by more than 10,000 municipal changes in the local business tax rate and federal tax reforms with locally varying effects. Using event study techniques, we find a sizable, negative effect of profit taxes on establishments’ total R&D spending and patents filed. Zooming into the innovation production process, we uncover substantial heterogeneity in the impact of profit taxation for various R&D input factors, among firm characteristics, and for different types of research projects.

Original language	English
Pages (from-to)	432-463
Number of pages	32
Journal	American Economic Journal-Economic Policy
Volume	17
Issue number	1
Early online date	18 Apr 2024
DOIs	https://doi.org/10.1257/pol.20220580
Publication status	Published - 3 Feb 2025

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10.1257/pol.20220580

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title = "Profit Taxation, R&D Spending, and Innovation",

abstract = " We study how profit taxes affect establishments{\textquoteright} R&D activities. Relying on detailed panel data of R&D-active firms in Germany over two decades, we exploit identifying variation induced by more than 10,000 municipal changes in the local business tax rate and federal tax reforms with locally varying effects. Using event study techniques, we find a sizable, negative effect of profit taxes on establishments{\textquoteright} total R&D spending and patents filed. Zooming into the innovation production process, we uncover substantial heterogeneity in the impact of profit taxation for various R&D input factors, among firm characteristics, and for different types of research projects. ",

author = "Andreas Lichter and Max L{\"o}ffler and Isphording, {Ingo E.} and Thu-Van Nguyen and Felix Poege and Sebastian Siegloch",

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AU - Lichter, Andreas

AU - Löffler, Max

AU - Isphording, Ingo E.

AU - Nguyen, Thu-Van

AU - Poege, Felix

AU - Siegloch, Sebastian

N1 - data sources: study combines various data sources discussed in more detail in the replication files. Most importantly: - Survey on Research and Development of the German Business Enterprise Sector (conducted by Stifterverband) - PATSTAT (by EPO) - Amadeus and Orbis (by Bureau van Dijk) - German municipal panel data (Federal Statistical Office and Statistical Offices of the German Länder)

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N2 - We study how profit taxes affect establishments’ R&D activities. Relying on detailed panel data of R&D-active firms in Germany over two decades, we exploit identifying variation induced by more than 10,000 municipal changes in the local business tax rate and federal tax reforms with locally varying effects. Using event study techniques, we find a sizable, negative effect of profit taxes on establishments’ total R&D spending and patents filed. Zooming into the innovation production process, we uncover substantial heterogeneity in the impact of profit taxation for various R&D input factors, among firm characteristics, and for different types of research projects.

AB - We study how profit taxes affect establishments’ R&D activities. Relying on detailed panel data of R&D-active firms in Germany over two decades, we exploit identifying variation induced by more than 10,000 municipal changes in the local business tax rate and federal tax reforms with locally varying effects. Using event study techniques, we find a sizable, negative effect of profit taxes on establishments’ total R&D spending and patents filed. Zooming into the innovation production process, we uncover substantial heterogeneity in the impact of profit taxation for various R&D input factors, among firm characteristics, and for different types of research projects.

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Profit Taxation, R&D Spending, and Innovation

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Der Einfluss lokaler Steuerpolitik auf betriebliche F&E-Aktivitäten