Profit taxation, R&D spending, and innovation

Abstract

We study how business taxes affect establishments’ R&D activities. Relying on geocoded panel data targeting the universe of R&D-active establishments in Germany, we exploit around 7, 300 changes in the local business tax rate over the period 1987 2013 for identification. Using event study techniques, we find a sizable negative and statistically significant effect of an increase in the local business tax on establishments’ total R&D spending and patents filed. Zooming into the process of innovation production, we uncover substantial heterogeneity in the impact of business taxation for various R&D inputs, among establishment characteristics, and for different types of research projects.