The Effect of Tax Avoidance Crackdown on Corporate Innovation
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The Effect of Tax Avoidance Crackdown on Corporate Innovation

  • Author(s): Li, Qin
  • Ma, Mark Shuai
  • Shevlin, Terry J
  • et al.
Abstract

To constrain the use of intangible assets in tax-motivated state income shifting and thus crack down on corporate tax avoidance, many U.S. state governments adopted addback statutes. Addback statutes reduce the state tax benefits that firms can gain from creating intangible assets such as patents. Using a large sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents that the firm assigns to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.

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