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Do corporate taxes influence the R&D and innovation activity of companies?

New study by Prof. Dr Sebastian Siegloch

According to the common statements of economic policymakers, research and development are among the most important factors for the strength and future viability of an economy. Hence, the promotion of corporate research and development activities of companies is one of the most important goals invoked by politicians of all persuasions. Corporate taxes usually play a central role here, as they reduce the investment activity of companies, especially in the area of R&D. At the same time, corporate taxes are also crucial in the financing of public goods, for example, trade taxes in Germany represent an essential basis for the income of municipalities. In many countries, therefore, there have been attempts to mitigate the negative effects of corporate taxes on R&D through targeted tax incentives for R&D.

In a recent study, published as ECONtribute Discussion paper No. 22, researchers led by Dr Sebastian Siegloch, investigate how corporate taxes can influence research & development and innovation activities. Andreas Lichter, Max Löffler, Ingo Isphording, Thu-Van Nguyen, Felix Poege and Sebastian Siegloch used panel data that registered around 7,300 changes in the local business tax rate in the period 1987-2013 to build their empirical study.

The team combined the data with information from a biennial longitudinal data set survey for research and development, which is collected and administered by the Stifterverband on behalf of the Federal Ministry of Education and Research. The survey is the central basis for the country’s official reporting on its corporate R&D activities to the EU authorities.

According to the researchers, the results clearly show that higher corporate taxes have a negative impact on R&D expenditure and innovation activity of companies. The negative incentive effects are particularly severe for companies that have difficulties financing their investments through loans. The economic policy conclusion of Sebastian Siegloch and his colleagues is: Targeted tax incentives for investments in R&D can compensate for the negative incentive effects of corporate taxes. Thus, the state does not have to forego too much tax revenue and at the same time does not restrict the innovation activity of companies excessively.