Attracting profit shifting or fostering innovation? On patent boxes and R&D subsidies

Andreas Haufler, D Schindler

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Abstract

Many countries have introduced patent box regimes in recent years, offering a reduced tax rate to businesses for their IP-related income. In this paper, we analyze how countries set optimal policies when both patent box regimes and R&D subsidies can be used to promote innovation. We show that patent box regimes emerge endogenously under policy competition, but never under policy coordination. Also, a partial tax coordination that abolishes patent box regimes but retains competition in corporate tax rates and R&D subsidies is welfare-improving in most cases. In this setting, policy competition is shifted to R&D subsidies, which cannot be used to attract profit shifting. Finally, we compare the competition for mobile patents with the competition for mobile R&D units and show that enforcing a nexus principle is likely to reduce the aggressiveness of patent box regimes.

Original languageEnglish
Article number104446
Number of pages28
JournalEuropean Economic Review
Volume155
DOIs
Publication statusPublished - Jun 2023

Bibliographical note

Funding Information:
We are grateful to two referees for their insightful comments and suggestions. The paper was presented at the Australasian Trade Workshop in Cairns, the THEMA seminar at CY Cergy Paris Université and at the online conferences of the Canadian Economic Association, the International Institute of Public Finance, the CESifo Area Conference in Public Economics and the Summer Symposium of the Oxford Centre for Business Taxation. We particularly thank Johannes Becker, Ron Davies, Irem Güceri, Anna Gumpert, Eckhard Janeba, Steffen Juranek, Sacha Kapoor, Etienne Lehmann, Max Löffler, Nadine Riedel, Max Todtenhaupt, Vladimir Tyazhelnikov and Martin Watzinger for many helpful comments and suggestions. We also thank Jonathan Gottschall for excellent research assistance. Andreas Haufler acknowledges financial support from the German Research Foundation through CRC TRR 190. The paper was started when Dirk Schindler visited CES at the University of Munich. He wishes to thank the members of CES for their hospitality.

Funding Information:
We are grateful to two referees for their insightful comments and suggestions. The paper was presented at the Australasian Trade Workshop in Cairns, the THEMA seminar at CY Cergy Paris Université and at the online conferences of the Canadian Economic Association, the International Institute of Public Finance, the CESifo Area Conference in Public Economics and the Summer Symposium of the Oxford Centre for Business Taxation. We particularly thank Johannes Becker, Ron Davies, Irem Güceri, Anna Gumpert, Eckhard Janeba, Steffen Juranek, Sacha Kapoor, Etienne Lehmann, Max Löffler, Nadine Riedel, Max Todtenhaupt, Vladimir Tyazhelnikov and Martin Watzinger for many helpful comments and suggestions. We also thank Jonathan Gottschall for excellent research assistance. Andreas Haufler acknowledges financial support from the German Research Foundation through CRC TRR 190. The paper was started when Dirk Schindler visited CES at the University of Munich. He wishes to thank the members of CES for their hospitality.

Publisher Copyright:
© 2023 Elsevier B.V.

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