Can Corporate Income Tax Cuts Stimulate Innovation?. (August 2020)

• Record Type: Journal Article
• Authors: Atanassov, Julian; Liu, Xiaoding
• Is Part Of: Journal of financial and quantitative analysis. Volume 55:Number 5(2020)
• Page Start: 1415
• Page End: 1465
• Publication Date: 2020-08
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109019000152
• Languages: English
• ISSNs: 0022-1090

Abstract

Abstract : 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.