Patent Boxes, Tax credits, or Both?

Devereux, Michael and Lockwood, Ben and Yerushalmi, Erez (2026) Patent Boxes, Tax credits, or Both? Working Paper 43. Centre for Accountancy Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University. (Submitted)

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Abstract

We analyze the relative desirability of R&D tax credits (TCs) and patent boxes (PBs) as instruments for stimulating R&D, in a setting which allows for several organizational forms within the R&D sector and where there are several market failures, all of which imply under-investment in R&D. There are two key features of the model. The first is that it is a closed economy, so the (international) profit shifting role for the PB is absent. The second is that there may be an unobservable input to R&D (e.g. managerial effort) that cannot be subsidized by a TC. The government can choose a TC, a PB, and also the main rate of CIT. We find that (i) when the unobservable input is absent, a PB should never be used, but a TC may be, if market failure is severe enough; (ii) when the unobservable input is present, the optimal policy depends on the need for tax revenue, as measured by the MCPF. When this is low, the TC should never be used, but a PB may be, but as need rises, both instruments should be used, and when it is very high,

Item Type:	Monograph (Working Paper)
Identification Number:	43
Dates:	Date Event 17 August 2026 Submitted
Uncontrolled Keywords:	R&D tax credits, patent boxes, corporate income tax, innovation policy, R&D spillovers, tax incentives
Subjects:	CAH15 - social sciences > CAH15-02 - economics > CAH15-02-01 - economics
Divisions:	Business School > Accountancy, Finance and Economics Business School > Accountancy, Finance and Economics > Centre for Accountancy Finance and Economics
Depositing User:	Gemma Tonks
Date Deposited:	20 Aug 2026 15:33
Last Modified:	20 Aug 2026 15:33
URI:	https://www.open-access.bcu.ac.uk/id/eprint/17177

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