Description:
We exploit a quasi-experimental setting to cleanly identify the effect of the adoption of an intellectual property box (IP box) on innovative activity and effective tax rates. We document an increase in innovative activity, including patent applications, grants, and highly-skilled employment, at the expense of patent quality. Domestic firms drive this effect. We also provide evidence that firms with patents, on average, enjoy 7.2 percent to 7.9 percent lower effective tax rates, with the most significant financial benefits accruing to multinational firms compared to domestic firms. Within multinational firms, those without outbound income-shifting opportunities appear to benefit more than other multinationals. Relative to studies that use heterogeneous IP boxes, our results suggest an IP box that provides tax benefits for patent income only leads to a reasonable increase in innovative activity of 0.4 to 5.1 percent, with multinationals benefitting disproportionately from a financial perspective