University of St.Gallen
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Profit Taxation, Innovation and the Financing of Heterogenous Firms

abstract Innovative firms are frequently credit constrained and tend to earn an above normal return on capital. This paper considers a discrete R&D decision that splits firms into innovative and standard ones. Active intermediaries can facilitate access to credit and improve capital allocation. We find that (i) financial development boosts innovation and welfare; (ii) ACE and cash-flow taxes are neutral with respect to user cost and standard firm investment but restrict constrained investment and harm innovation and welfare; (iii) an ACE tax is less harmful than an equal yield cash-flow tax although they are equivalent in perfect capital markets; (iv) a self-financed R&D tax credit redistributes towards constrained firms and promotes innovation and welfare; (v) revenue neutral tax cut cum base broadening similarly boosts innovation and welfare.
   
type discussion paper (English)
   
keywords Innovation, credit constraints, financial development, tax policy.
   
date of appearance 10-4-2012
page(s) 1-34
review not reviewed
   
citation Keuschnigg, C., & Ribi, E. (2012). Profit Taxation, Innovation and the Financing of Heterogenous Firms.