Do Corporate Taxes Hinder Innovation?
|Source||29th European Economic Association meeting, Toulouse , 2014|
|Summary||We exploit staggered changes in state-level corporate tax rates to show that an increase in taxes reduces future innovation. Our evidence, which also exploits policy discontinuity at contiguous counties straddling state borders, shows that local economic conditions do not drive our results. The effect we document is consistent across the innovation spectrum: taxes affect not only patenting and R&D investment but also new product introductions, which we measure using textual analysis. In the cross-section, we document that the tax effect is stronger among firms that face higher marginal tax rates, those that have a higher proportion of operations in states that change taxes, and those that are located in states which make shifting profits out of the state for tax reasons more difficult. Finally, we examine potential channels, and find that our empirical results are particularly consistent with models that highlight the role of higher corporate taxes in reducing innovator incentives and discouraging risk-taking.|