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  3. American Economic Journal: Economic Policy
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  5. Profit Taxation, R&D Spending, and Innovation

American Economic Journal:
Economic Policy

ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)

Profit Taxation, R&D Spending, and Innovation

  • Andreas Lichter
  • Max Löffler
  • Ingo E. Isphording
  • Thu-Van Nguyen
  • Felix Poege
  • Sebastian Siegloch
American Economic Journal: Economic Policy (Forthcoming)

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.

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