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Unintended consequences of tax incentives on export product quality: Evidence from a natural experiment in China

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  • Dongmin Kong
  • Mengxu Xiong

Abstract

This study investigates the effects of tax incentives on export product quality. Using a staggered value‐added tax reform in China as exogenous shocks, our difference‐in‐differences estimation shows that tax cuts causally reduce product quality at the firm‐level (product‐level) by 5.3% (8.6%). A plausible mechanism appears to be the output and export expansion, which crowd out human capital and thus undermine quality. The results are more pronounced for non‐state‐owned firms, firms under high tax reinforcement effort, and firms subjecting to high financial constraints. This study provides clear policy implications by shedding light on the unintended consequences of tax incentives on export product quality.

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  • Dongmin Kong & Mengxu Xiong, 2021. "Unintended consequences of tax incentives on export product quality: Evidence from a natural experiment in China," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 802-837, September.
    • Handle: RePEc:bla:reviec:v:29:y:2021:i:4:p:802-837
    DOI: 10.1111/roie.12499
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    5. Xiaogang He & Ruifeng Teng & Dawei Feng, 2024. "Climbing the Export Quality Ladder: Role of Human Capital," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 32(2), pages 125-159, March.
    6. Zhou, Kuo & Wang, Qiaochu & Tao, Yunqing & Li, Xiaofan, 2024. "Information infrastructure construction and firm export performance in China," Research in International Business and Finance, Elsevier, vol. 70(PA).
    7. Yang, Shubo & Jahanger, Atif & Hossain, Mohammad Razib & Wang, Yanming & Balsalobre-Lorente, Daniel, 2023. "Enhancing export product quality through innovative cities: A firm-level quasi-natural experiment in China," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 462-478.
    8. Qiu, Guojing & Si, Deng-Kui & Hu, Debao & Li, Xinqi, 2023. "Banking deregulation and export product quality," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    9. Sumaira Saeed & Miraj ul Haq & Arshad Ali Bhatti, 2024. "The Role of Moderators on Product Quality and Export Flows: The Case of Pakistan," Journal of Economic Impact, Science Impact Publishers, vol. 6(1), pages 27-36.
    10. Kunpeng Zhang & Yibei Guo & Xiaotian Hu, 2024. "Does Tax Sharing Matter for Export Quality Upgrading? Evidence from China," Sustainability, MDPI, vol. 16(11), pages 1-20, June.
    11. Zhao, Zhiqi & Yue, Yong & Wang, Wangshuai, 2024. "Unintended consequences of tax incentives on firms' human capital composition: Evidence from China," China Economic Review, Elsevier, vol. 84(C).
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