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How do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China

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Abstract
China initiated a critical value-added tax reform in 2004. Completed in 2009, it introduced permanent tax credit for firms' investment infixed assets. We use a quasi-experimental design and a unique firm-level dataset covering all sizes of firms across a broad range of sectors and regions between 2005 and 2012, to test whether the reform promoted firms' investment and productivity. We estimate that, on average, the reform raised investment and productivity of the treated firms relative to the control firms by 8.8 percent and 3.7 percent, respectively. We also show that the positive effects tend to be strengthened for firms with financial constraints.

Suggested Citation

  • Yongzheng LiuAuthor-Email: yongzheng.liu@ruc.edu.cn & Jie Mao, 2017. "How do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1716, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:ays:ispwps:paper1716
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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • P35 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Public Finance

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