Study: “The effect of corporate taxes pervades all stages of innovation.”
Kamala Harris vows to raise the federal corporate income tax rate to 28%, a 33% increase from the current 21% rate. Not only is the Kamala rate higher than China’s 25% rate, the Kamala tax hike will hurt American innovation.
A study published in the April 2017 edition of the Journal of Financial Economics finds that corporate tax increases reduce patenting, reduce R&D, and reduce new product introductions.
Key excerpts are below.
Excerpt 1:
We find evidence that firms respond to tax increases by filing a lower number of patents, investing less in R&D, and bringing fewer new products into the market, which, taken together, suggests that higher corporate taxes indeed reduce innovator incentives and discourage risk-taking.
Excerpt 2:
In this paper we examine staggered corporate income tax changes at the US state level over 1990–2006, and find that higher corporate taxes indeed reduce future innovation by affected firms. In particular, our conservative estimates imply that about 67% of treated firms affected by a tax increase file for approximately one fewer patent following the increase, as compared to a neighboring firm exposed to similar economic conditions but not affected by any tax change. This is approximately a 5% change in patenting activity. To allow for asymmetric effects, we consider tax increases and decreases separately, and find that most of this effect comes from the increases.
Excerpt 3:
Importantly, we find that the decline in innovation is not limited to patenting activity—the drop in patenting is accompanied by a 4.3% decline in research and development (R&D) expenditures as well as a 5.1% decline in final innovation output—new product introductions—which we measure using a novel textual analysis-based metric. These findings, taken together, imply that the effect of corporate taxes pervades all stages of innovation. To the extent that innovation is regarded as a key determinant of economic growth, we believe that these results are not only academically interesting, but also timely and policy-relevant.
Excerpt 4:
Indeed, there are many possible reasons why corporate taxes may matter for future growth. For instance, the decline in after-tax profits from innovation projects following tax increases can lead innovators to reduce or redirect effort, affecting aggregate innovation activity. Alternatively, any increase in taxes which accentuates the progressivity of the tax schedule might discourage more risky innovative projects. In addition, a tax increase may raise the attractiveness of debt to firms (Heider and Ljungqvist, 2015), which in turn is not the favored form of financing for innovation. Moreover, taxes might also lower internal cash flows, that have been shown to be a major source of financing for innovation activities (e.g., Himmelberg and Petersen, 1994).
Excerpt 5:
Overall, our results provide first evidence that tax increases lead to a decrease in innovation across every step of innovation process—R&D, patents, and our newly developed measure of new products—and that the tax effect is neither driven by local economic changes nor by biases related to the predictability of tax changes.
Read the full study here.
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