Should there be lower taxes on patent income?

Abstract

The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Innovative firms’ cash holdings, tax policies, and institutional environments

“…Then, we focus on innovative multinationals and find that their cash holdings significantly increase after the introduction of patent boxes. The result is consistent with previous evidence that patent boxes increase patent registrations, transfers, and inward profit shifting by multinationals and also improve their productivity and profitability (e.g., Ciaramella, 2017; Gaessler, Hall, & Harhoff, 2021; Griffith et al., 2014; Koethenbuerger et al., 2019). Hence, for more productive and innovative multinationals, the favorable tax treatment of income from patents could result in higher after‐tax profits and thereby larger cash balances.…”

“…For example, multinationals have an incentive to locate their patents in low‐tax countries (e.g., Griffith et al., 2014; Karkinsky & Riedel, 2012). The tax advantages of patent boxes attract patent registrations, patent transfers, and profit shifting by multinationals, yielding substantial tax savings (e.g., Alstadsæter et al., 2018; Chen et al., 2019; Ciaramella, 2017; Gaessler et al., 2021). Patent boxes also raise the productivity and profit levels of multinational affiliates (Koethenbuerger et al., 2019).…”

“…Fourth, it relates to the studies on innovation and tax incentives (e.g., Atanassov & Liu, 2020; Cai et al., 2018; Gentry & Hubbard, 2005; Mukherjee et al., 2017). Last, it contributes to the ongoing policy debate regarding the economic effects of patent boxes (Gaessler et al., 2021; Hall, 2020), which is of increasing importance as more and more countries have introduced them in recent years. Our evidence suggests they have a positive effect.…”

Innovation: Market Failures and Public Policies

“…While the policy is often described as a way of incentivizing R&D, in practice patent boxes raise the risk of inducing tax competition given that firms -particularly multinationals -often have flexibility in deciding where to book the taxable income generated by patented products. Consistent with this concern, Gaessler, Hall, and Harhoff (2018) and Alstadsaeter, Barrios, Nicodeme, Skonieczna, and Vezzani (2018) provide evidence of high-value patents being relocated to markets with patent boxes, and fail to find evidence of either higher R&D expenditures in markets with patent boxes or aggregate increases in R&D investments.…”

Reexaming the Economic Recovery Tax Act of 1981: Evidence From Innovative Efficiency

“…Stewart, Warda and Atkinson (2012) find that the U.S. was ranked only 27th based on R&D tax incentives among 42 countries. In addition to higher credit rates for R&D, some nations, such as the United Kingdom and France, provide additional deduction for revenue earned from innovation (Mohnen, Vankan & Verspagen, 1997;Gaessler, Hall & Harhoff, 2021).…”