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

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  • Yongzheng Liu
  • Jie Mao

Abstract

China initiated a major reform for capital taxation in 2004. Completed in 2009, it introduced permanent tax incentives for firms' investment in fixed assets. We explore a unique firm-level dataset from years 2005–2012 and utilize a quasi-experimental design to test the impacts of the reform on firms' investment and productivity. We find that, on average, the reform raised investment and productivity of the treated firms relative to the control firms by 38.4 percent and 8.9 percent, respectively. We also show that the positive effects tend to be strengthened for firms with financial constraints.

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  • Yongzheng Liu & Jie Mao, 2019. "How Do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China," American Economic Journal: Economic Policy, American Economic Association, vol. 11(3), pages 261-291, August.
    • Handle: RePEc:aea:aejpol:v:11:y:2019:i:3:p:261-91
    Note: DOI: 10.1257/pol.20170478
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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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