An increase in local business taxes has a negative impact on innovation in companies and economic growth in Germany. Higher taxes cause companies to reallocate their research and development (R&D) activities or abandon them altogether. As a result, the number of newly registered patents decreases, and with it the competitiveness in the market. This is the conclusion of an international team of researchers who examined how changes in local business tax rates slowed innovation over a 30-year period. “Higher taxation on companies leads them to reduce their investment in research and development, regardless of the company’s size. It is worthwhile for policymakers to take a closer look at this matter. So far, tax incentives for R&D have often been closely linked to the size of a company,” says Professor Sebastian Siegloch, head of the ZEW Research Department “Social Policy and Redistribution”. Under the Research Allowance Act implemented in Germany in 2019, all businesses conducting R&D have access to research allowances, which is a reasonable approach.