This paper examines the impact of tax incentives on corporate research and
development (R&D) activity. Traditionally, R&D tax incentives have been pro-
vided in the form of special tax allowances and tax credits. In recent years, sev-
eral countries moreover reduced their income tax rates on R&D output (patent
boxes). Previous papers have shown that all three tax instruments are effective
in raising the quantity of R&D related activity. We provide evidence that, be-
yond this quantity effect, corporate taxation also distorts the quality of R&D
projects, i.e. their innovativeness and revenue potential. Using rich data on cor-
porate patent applications to the European patent office, we find that a low tax
rate on patent income is instrumental in attracting innovative projects with a
high earnings potential and innovation level. The effect is statistically signifi-
cant and economically relevant and prevails in a number of sensitivity checks.
R&D tax credits and tax allowances are in turn not found to exert a statistically
significant impact on project quality.
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