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Do Corporate Taxes Hinder Innovation?

date Date: June 22, 2014
date Author(s): Abhiroop Mukherjee, Manpreet Singh, Alminas Zaldokas
date Affiliation: Hong Kong University of Science & Technology
Abstract

We examine staggered changes in state-level corporate tax rates to show that an increase in taxes reduces future innovation. To sharpen our analysis, we exploit a novel dataset containing information on the geography of firms’ operations, and document that the effect is stronger among firms that have a higher proportion of operations in states that pass tax changes, and those that are located in states with laws that make shifting profits out of the state for tax reasons more difficult. Finally, we address concerns regarding endogeneity of tax changes by using instruments based on state legislative rules concerning tax increases.

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