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 2 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.
CITATION STYLE
Atanassov, J., & Liu, X. (2020, August 1). Can corporate income tax cuts stimulate innovation? Journal of Financial and Quantitative Analysis. Cambridge University Press. https://doi.org/10.1017/S0022109019000152
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