Hostname: page-component-8448b6f56d-sxzjt Total loading time: 0 Render date: 2024-04-24T22:49:18.162Z Has data issue: false hasContentIssue false
  • English
  • Français

Can Corporate Income Tax Cuts Stimulate Innovation?

Published online by Cambridge University Press:  22 February 2019

Julian Atanassov  and
Xiaoding Liu
Julian Atanassov
Affiliation:
Atanassov, julian@unl.edu, University of Nebraska
Xiaoding Liu*
Affiliation:
Liu, xliu@mays.tamu.edu, Texas A&M University
*
Liu (corresponding author), xliu@mays.tamu.edu
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 5 , August 2020 , pp. 1415 - 1465
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Footnotes

We thank an anonymous referee, James Chyz, Jon Garfinkel, Austan Goolsbee, Dave Gunther, Michelle Hanlon, Jarrad Harford (the editor), Glenn Hubbard, Linda Krull, Alexander Ljungqvist, Neviana Petkova, Jay Ritter, Ryan Wilson, Brian Wolfe, Alminas Zaldokas, and Stefan Zeume; participants at the 2014 University of North Carolina (UNC) Tax Symposium, the 2014 Tokyo Asian Financial Management Association (FMA) Conference, the 2014 National Bureau of Economic Research (NBER) Innovation Summer Institute, the 2014 Pacific Northwest Finance Conference, the 2015 Eighth Annual Searle Center Conference on Innovation Economics, the 2015 Entrepreneurial Finance and Innovation around the World Conference, the 2016 China International Finance Conference, the 2017 NBER Economic Effects of State Business Taxation Conference, the 2018 European Finance Conference; and seminar participants at DePaul University, Tulane University, the University of Oregon, the University of Tennessee, the University of Nebraska, the University of Kansas, the University of Florida, Northeastern University, the University of Arizona, the University of California, Riverside, the University of Iowa, Iowa State University, the U.S. Department of the Treasury, the University of New South Wales, and the University of Melbourne for their useful comments and suggestions. We also thank the Innovation Research Center at Mays Business School for their support.

References

Acharya, V.; Almeida, H.; and Campello, M.. “Aggregate Risk and the Choice between Cash and Lines of Credit.” Journal of Finance, 68 (2013), 2059–2116.Google Scholar
Acharya, V.; Baghai, R.; and Subramanian, K.. “Wrongful Discharge Laws and Innovation.” Review of Financial Studies, 27 (2014), 301–346.Google Scholar
Aghion, P.; Bloom, N.; Blundell, R.; Griffith, R.; and Howitt, P.. “Competition and Innovation: An Inverted U Relationship.” Quarterly Journal of Economics, 120 (2005), 701–728.Google Scholar
Atanassov, J.“Does the Threat of Hostile Takeovers Stifle Innovation?” Journal of Finance, 68 (2013), 1097–1133.Google Scholar
Auerbach, A., and Hassett, K.. “Tax Policy and Business Fixed Investment in the United States.” Journal of Public Economics, 47 (1992), 141–170.Google Scholar
Balakrishnan, K.; Blouin, J. L.; and Guay, W. R.. “Tax Aggressiveness and Corporate Transparency.” Accounting Review, 94 (2019), 45–69.Google Scholar
Barro, R., and Redlick, C.. “Macroeconomic Effects from Government Purchases and Taxes.” Quarterly Journal of Economics, 126 (2011), 51–102.Google Scholar
Becker, B.“Wealth and Executive Compensation.” Journal of Finance, 61 (2006), 379–397.Google Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.Google Scholar
Bhagat, S., and Welch, I.. “Corporate Research and Development Investments: International Comparisons.” Journal of Accounting and Economics, 19 (1995), 443–470.Google Scholar
Brown, J.; Fazzari, S.; and Petersen, B.. “Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom.” Journal of Finance, 64 (2009), 151–185.Google Scholar
Brown, J.; Martinsson, G.; and Petersen, B.. “Do Financing Constraints Matter for R&D?” European Economic Review, 56 (2012), 1512–1529.Google Scholar
Brown, J., and Martinsson, G.. “Taxing Capital, Stunting Growth? Capital Income Taxes, Costly Equity Finance, and Investment in R&D.” Working Paper, Swedish House of Finance (2016).Google Scholar
Cain, D.; McKeon, S.; and Solomon, S.. “Do Takeover Laws Matter? Evidence from 5 Decades of Hostile Takeovers.” Journal of Financial Economics, 124 (2017), 464–485.Google Scholar
Chamberlain, G.“Analysis of Covariance with Qualitative Data.” Review of Economic Studies, 47 (1980), 225–238.Google Scholar
Chava, S.; Oettl, A.; Subramanian, A.; and Subramanian, K.. “Bank Deregulation and Innovation.” Journal of Financial Economics, 109 (2013), 759–774.Google Scholar
Congressional Budget Office. “International Comparisons of Corporate Income Tax Rates.” Available at https://www.cbo.gov/sites/default/files/115th-congress-2017-2018/reports/52419-internationaltaxratecomp.pdf(2017).Google Scholar
Cornaggia, J.; Mao, Y.; Tian, X.; and Wolfe, B.. “Does Banking Competition Affect Innovation?” Journal of Financial Economics, 115 (2015), 189–209.Google Scholar
Cummins, J.; Hassett, K.; and Hubbard, G.. “Tax Reforms and Investment: A Cross-Country Comparison.” Journal of Public Economics, 62 (1996), 237–273.Google Scholar
Dittmar, A., and Mahrt-Smith, J.. “Corporate Governance and the Value of Cash Holdings.” Journal of Financial Economics, 83 (2007), 599–634.Google Scholar
Djankov, S.; Ganser, T.; McLiesh, C.; Ramalho, R.; and Shleifer, A.. “The Effect of Corporate Taxes on Investment and Entrepreneurship.” American Economic Journal: Macroeconomics, 2 (2010), 31–64.Google Scholar
Dyreng, S.; Hanlon, M.; and Maydew, E.. “Long-Run Corporate Tax Avoidance.” Accounting Review, 83 (2008), 61–82.Google Scholar
Dyreng, S., and Lindsey, B.. “Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax Havens and Other Countries on U.S. Multinational Firms’ Tax Rates.” Journal of Accounting Research, 47 (2009), 1283–1316.Google Scholar
Edelen, R., and Warner, J.. “Aggregate Price Effects of Institutional Trading: A Study of Mutual Fund Flow and Market Returns.” Journal Financial Economics, 59 (2001), 195–220.Google Scholar
Fama, E., and French, K.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.Google Scholar
Farre-Mensa, J., and Ljungqvist, A.. “Do Measures of Financial Constraints Measure Financial Constraints?” Review of Financial Studies, 29 (2016), 271–308.Google Scholar
Faulkender, M.; Flannery, M.; Hankins, K.; and Smith, J.. “Cash Flows and Leverage Adjustments.” Journal of Financial Economics, 103 (2011), 632–646.Google Scholar
Garcia, D., and Norli, O.. “Geographic Dispersion and Stock Returns.” Journal of Financial Economics, 106 (2012), 547–565.Google Scholar
Giroud, X., and Rauh, J.. “State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data.” Journal of Political Economy, 127 (2019), 1262–1316.Google Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–156.Google Scholar
Griliches, Z.“Patent Statistics as Economic Indicators: A Survey.” Journal of Economic Literature, 28 (1990), 1661–1707.Google Scholar
Griliches, Z.; Pakes, A.; and Hall, B.. “The Value of Patents as Indicators of Inventive Activity.” In Economic Policy and Technological Performance, Dasgupta, P. and Stoneman, P., eds. Cambridge, England: Cambridge University Press (1987).Google Scholar
Hadlock, C., and Pierce, J.. “New Evidence on Measuring Financial Constraints: Moving beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.Google Scholar
Hall, B.“Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?” Working Paper 4096, National Bureau of Economic Research (1992).Google Scholar
Hall, B.; Jaffe, A.; and Trajtenberg, M.. “The NBER Patent Citations Data File: Lessons, Insights and Methodological Tools.” Working Paper 8498, National Bureau of Economic Research (2001).Google Scholar
Hall, B.; Jaffe, A.; and Trajtenberg, M.. “Market Value and Patent Citations.” RAND Journal of Economics, 32 (2005), 101–128.Google Scholar
Hall, B., and Lerner, J.. “The Financing of R&D and Innovation.” In Handbook of the Economics of Innovation, Hall, B. H. and Rosenberg, N., eds. Amsterdam, Netherlands: Elsevier/North-Holland (2010).Google Scholar
Hall, B., and Ziedonis, R.. “The Determinants of Patenting in the U.S. Semiconductor Industry 1980–1994.” RAND Journal of Economics, 32 (2001), 101–128.Google Scholar
Hall, R., and Jorgenson, D.. “Tax Policy and Investment Behavior.” American Economic Review, 57 (1967), 391–414.Google Scholar
Hassett, K., and Hubbard, G.. “Tax Policy and Business Investment.” In Handbook of Public Economics, Vol. III, Auerbach, A. and Feldstein, M., eds. Amsterdam, Netherlands: North-Holland (2002).Google Scholar
Heider, F., and Ljungqvist, A.. “As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes.” Journal of Financial Economics, 118 (2015), 684–712.Google Scholar
Hennessy, C., and Strebulaev, I.. “Beyond Random Assignment: Credible Inference of Causal Effects in Dynamic Economies.” Working Paper 20978, National Bureau of Economic Research (2015).Google Scholar
Himmelberg, C., and Petersen, B.. “R&D and Internal Finance: A Panel Study of Small Firms in High-Tech Industries.” Review of Economics and Statistics, 76 (1994), 38–51.Google Scholar
Hines, J., and Rice, E.. “Fiscal Paradise: Foreign Tax Havens and American Business.” Quarterly Journal of Economics, 109 (1994), 149–182.Google Scholar
Hochberg, Y.; Serrano, C.; and Ziedonis, R.. “Intangible but Bankable.” Science, 348 (2015), 1202.Google Scholar
Hochberg, Y.; Serrano, C.; and Ziedonis, R.. “Patent Collateral, Investor Commitment, and the Market for Venture Lending.” Journal of Financial Economics, 130 (2018), 74–94.Google Scholar
Jensen, M.“Takeovers: Their Causes and Consequences.” Journal of Economic Perspectives, 2 (1988), 21–48.Google Scholar
Kaplan, S., and Zingales, L.. “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?” Quarterly Journal of Economics, 115 (1997), 707–712.Google Scholar
Klarner, C.“State Partisan Balance Data 1937–2011.” Available at http://hdl.handle.net/1902.1/20403 (2013).Google Scholar
Kogan, L.; Papanikolaou, D.; Seru, A.; and Stoffman, N.. “Technological Innovation, Resource Allocation, and Growth.” Quarterly Journal of Economics, 132 (2017), 665–712.Google Scholar
Lerner, J., and Seru, A.. “The Use and Misuse of Patent Data: Issues for Corporate Finance and Beyond.” Working Paper, Harvard University (2015).Google Scholar
Ljungqvist, A., and Smolyansky, M.. “To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income.” Working Paper 20753, National Bureau of Economic Research (2016).Google Scholar
Lowry, M., and Schwert, W.. “Is the IPO Pricing Process Efficient?” Journal of Financial Economics, 71 (2004), 3–26.Google Scholar
Manso, G.“Motivating Innovation.” Journal of Finance, 66 (2011), 1823–1869.Google Scholar
Matvos, G.; Seru, A.; and Silva, R.. “Financial Market Frictions and Diversification.” Journal of Financial Economics, 127 (2018), 21–50.Google Scholar
Mukherjee, A.; Singh, M.; and Zaldokas, A.. “Do Corporate Taxes Hinder Innovation?” Journal of Financial Economics, 124 (2017), 195–221.Google Scholar
Nickell, S.“Biases in Dynamic Models with Fixed Effects.” Econometrica, 49 (1981), 1417–1426.Google Scholar
Opler, T.; Pinkowitz, L.; Stulz, R.; and Williamson, R.. “The Determinants and Implications of Corporate Cash Holdings.” Journal of Financial Economics, 52 (1999), 3–46.Google Scholar
Pakes, A., and Shankerman, M.. “The Rate of Obsolescence of Patents, Research Gestation Lags, and the Private Rate of Return to Research Resources.” In R&D, Patents and Productivity, Griliches, Z., ed. Chicago, IL: University of Chicago Press (1984).Google Scholar
Petersen, M.“Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.Google Scholar
Ramey, V.“Identifying Government Spending Shocks: It’s All in the Timing.” Quarterly Journal of Economics, 126 (2011), 1–50.Google Scholar
Romer, C., and Romer, D.. “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks.” American Economic Review, 100 (2010), 763–801.Google Scholar
Romer, P.“Endogenous Technological Change.” Journal of Political Economy, 98 (1990), 71–102.Google Scholar
Shleifer, A., and Vishny, R.. “A Survey of Corporate Governance.” Journal of Finance, 52 (1997), 737–783.Google Scholar
Solow, R.“Technical Change and the Aggregate Production Function.” Review of Economics and Statistics, 39 (1957), 312–320.Google Scholar
Tirole, J.The Theory of Corporate Finance. Princeton, NJ: Princeton University Press (2006).Google Scholar
Whited, T., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.Google Scholar
Wilson, D.“Beggar Thy Neighbor? The In-State, Out-of-State, and Aggregate Effects of R&D Tax Credits.” Review of Economics and Statistics, 91 (2009), 431–436.Google Scholar
Yermack, D.“Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns.” Journal of Financial Economics, 80 (2006), 211–242.Google Scholar
Supplementary material: File

Atanassov and Liu supplementary material

Atanassov and Liu supplementary material

Download Atanassov and Liu supplementary material(File)
File 168.6 KB