International Tax and Public Finance

, Volume 21, Issue 4, pp 694–719 | Cite as

Corporate taxation and the quality of research and development

  • Christof Ernst
  • Katharina Richter
  • Nadine Riedel


This paper examines the impact of tax incentives on corporate research and development (R&D) activity. R&D tax incentives are commonly provided as special tax allowances or tax credits. In recent years, several countries also reduced their income tax rates on R&D output with the purpose to foster R&D activity. Previous papers have shown that all three tax instruments are effective in raising the quantity of R&D related activity. We in turn assess the impact of corporate tax incentives on the quality of R&D projects, i.e., their innovativeness and earnings potential. Using rich data on corporate patent applications to the European patent office, we find that a low tax rate on patent income raises the average profitability and innovation level of the projects undertaken in a country. The effect is statistically significant and economically relevant and prevails in a number of sensitivity checks. Generous R&D tax credits and tax allowances are in contrast found to exert a negative impact on project quality.


Corporate taxation Research and development Micro data 

JEL Classification

H3 H7 J5 



Financial support of the research programme “Strengthening Efficiency and Competitiveness in the European Knowledge Economies (SEEK),” financed by the government of Baden-Wuerttemberg, is gratefully acknowledged. Moreover, we are indebted to Clemens Fuest, Georg Licht, Christoph Spengel, Johannes Voget, Jost Heckemeyer, Nadja Dwenger and participants of the SEEK Workshop at ZEW Mannheim and the 69th IIPF congress held in Taormina for helpful comments and suggestions.

Supplementary material

10797_2014_9315_MOESM1_ESM.pdf (53 kb)
Supplementary material 1 (pdf 52 KB)


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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Christof Ernst
    • 1
  • Katharina Richter
    • 1
  • Nadine Riedel
    • 2
  1. 1.Centre for European Economic Research (ZEW Mannheim)MannheimGermany
  2. 2.University of HohenheimStuttgartGermany

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