As countries compete for corporate R&D locations–and the attendant jobs and technology spillovers–tax policy is an important tool governments need to be aware of. There are several types of tax policies that attempt to attract R&D: tax credits for R&D spending, special tax allowances for R&D spending, and tax rate reductions on R&D output (usually based on patents). While it is well established that R&D spending and tax allowances tend to increase the quantity of R&D spending, a new paper by UK researchers Ernst, Richter, and Riedel finds that reductions in patent income taxes increase the quality of corporate research. Higher-quality research means effective R&D that has better benefits for the entire economy.
These research results are good news for the UK, which recently enacted “Patent Box” legislation, giving companies a 50% discount on profits they earn from patents (down to 10% from their planned 2015 overall corporate rate of 20%). Other countries that offer similar tax breaks for patent income include Luxembourg, the Netherlands, and Belgium.