We study how profit taxation affects plants’ R&D spending and innovation activities. Relying on geocoded survey panel data which approximately covers the universe of R&D-active plants in Germany, we exploit around 7,300 changes in the municipal business tax rate over the period 1987–2013 for identification. Applying event study models, we find a negative and statistically significant effect of an increase in profit taxation on plants’ R&D spending with an implied long-run elasticity of −1.25. Reductions in R&D are particularly strong among more credit-constrained plants. In contrast, homogeneity of effects across the plant size distribution questions policy makers common practice to link targeted R&D tax incentives to plant size. We further find lagged negative effects on the (citation-weighted) number of filed patents.

Lichter, Andreas, Max Löffler, Ingo E. Isphording, Thu-Van Nguyen, Felix Pöge and Sebastian Siegloch (2021), Profit Taxation, R&D Spending, and Innovation, ZEW Discussion Paper No. 21-080, Mannheim. Download


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


corporate taxation, firms, R&D, innovation, patents