Can Corporate Income Tax Cuts Stimulate Innovation?
83 Pages Posted: 30 Oct 2015 Last revised: 8 Feb 2019
Date Written: February 5, 2019
We hypothesize that corporate income taxes distort firms' incentives to innovate by reducing their pledgeable income. Using a differences-in-differences methodology, we document that large corporate income tax cuts boost corporate innovation. We find a similar but opposite effect for tax increases. Most of the change in innovation occurs two or more years after the tax change, and there's no effect before the tax change. Exploring the mechanisms, we show that tax cuts have a stronger impact on innovation for firms with weaker governance, greater financial constraints, fewer tangible assets, smaller patent stock, and a greater degree of tax avoidance.
Keywords: Taxes, Innovation, R&D, Pledgeable Income, Incentives, Patents, Patent Citations, Tax Avoidance, Financial Constraints, Corporate Governance, Productivity, Economic growth
JEL Classification: G31, G32, G34, G38
Suggested Citation: Suggested Citation