American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Profit Taxation, R&D Spending, and Innovation
American Economic Journal: Economic Policy
vol. 17,
no. 1, February 2025
(pp. 432–63)
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.Citation
Lichter, Andreas, Max Löffler, Ingo E. Isphording, Thu-Van Nguyen, Felix Poege, and Sebastian Siegloch. 2025. "Profit Taxation, R&D Spending, and Innovation." American Economic Journal: Economic Policy 17 (1): 432–63. DOI: 10.1257/pol.20220580Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- H32 Fiscal Policies and Behavior of Economic Agents: Firm
- H71 State and Local Taxation, Subsidies, and Revenue
- O31 Innovation and Invention: Processes and Incentives
- O34 Intellectual Property and Intellectual Capital