R&D Investments, Innovation and Corporate Taxation: Evidence from German Municipalities

Governments around the world impose taxes to fund infrastructure and the provision of public goods. Which form this taxation should take has long been at the center of both scholarly and political debate. Innovation effects of these taxes are especially relevant because new ideas, products, and services are of fundamental importance for the generation of future wealth and competitiveness. Therefore, much academic research has focused on the various R&D subsidies and tax breaks which exist globally. However, the effects of general corporate taxation have not been studied as much. This is especially due to the lack of proper settings in which to study them. Usually, corporate taxes are levied at the national level, so that changes impact all companies in the same way and no proper comparison can be made. Yet, in Germany, the situation is different. Here, the municipalities decide on the level of the local business tax (Gewerbesteuer), these levels are heterogeneous and change frequently. This enables our study, where we try to determine the corporate reactions in the innovation domain to tax changes.