R&D tax incentives and the emergence and trade of ideas

Abstract

This paper establishes the biggest existing data set on R&D tax incentives, covering 106 countries annually between 1996 and 2012. We formulate two combined measures of tax incentives: one is a measure of effective marginal tax reductions on R&D incentives, referred to as the b-index in the literature, of which existing data sets cover up to 38 countries; a second, novel one is the effective average tax rate on profits from R&D investments (EATRR&D), which is not available from other databases. Marginal tax incentives are mainly relevant for marginal R&D investments, while average effective tax rates matter for discrete R&D investments (e.g. plant or lab location). The paper assesses effects of these incentives on the filing and trading of patents (conditional on other drivers of patenting) based on some two million patent incidents from the European Patent Office. The results suggest that a higher level of effective average front-end R&D tax incentives raises the propensity to file and acquire patents, and reduces the incentive to sell patents. Moreover, more extensive effective average back-end R&D tax incentives raise the propensity to acquire patents. Statutory tax rates and super deductions are particularly important for patent filing, and tax credits and super deductions have the biggest impact on patent trading. Patent boxes seem to influence patent trading negatively.