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Impact of Tax Reductions on Public–Private Partnership Projects: Evidence from Comprehensive Implementation of China’s Business Tax to Value-Added Tax Reform

Author

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  • Jing Zhao

    (Research Institute for Global Value Chains, University of International Business and Economics, Beijing 100029, China
    Laboratory for Global Value Chains, University of International Business and Economics, Beijing 100029, China)

  • Wei Wang

    (Chinese University of Hong Kong-Tsinghua University Joint Research Center for Chinese Economy, Tsinghua University, Beijing 100084, China)

Abstract

This paper evaluates whether and how tax reduction policies affect public–private partnership (PPP) projects in China by using the complete conversion from business tax to value-added tax (BT-to-VAT) as a significant case. This reform enhances overall productivity and intensifies fiscal pressure on local governments through substantial tax reductions. Utilizing a sample of PPP projects from 2014 to 2019 and a difference-in-differences methodology, this paper treats the BT-to-VAT reform’s full rollout as a quasi-natural experiment to estimate its impact on PPPs. The results indicate that the full rollout of this reform results in a 20.93% increase in the number of PPP projects and an 11.43% rise in investment values, notably accelerating project execution. Mechanism tests reveal that this reform exacerbates fiscal disparities among cities while boosting total factor productivity (TFP) at the city level. Consequently, it increases local government demand for PPP initiatives and strengthens social capital’s capacity to engage in such partnerships—ultimately facilitating broader adoption and implementation of the PPP model. Furthermore, the effect is more pronounced for PPPs in the transportation and urban development sectors. Additionally, stronger impacts are observed in cities characterized by larger fiscal gaps, higher infrastructure demands, and greater prior PPP experience, as well as those located in central and western regions. This paper is one of the first to quantitatively assess the effect of fully implementing BT-to-VAT transition on PPPs, which is crucial for sustainable development concerning infrastructure and fiscal sustainability.

Suggested Citation

  • Jing Zhao & Wei Wang, 2024. "Impact of Tax Reductions on Public–Private Partnership Projects: Evidence from Comprehensive Implementation of China’s Business Tax to Value-Added Tax Reform," Sustainability, MDPI, vol. 17(1), pages 1-22, December.
    • Handle: RePEc:gam:jsusta:v:17:y:2024:i:1:p:95-:d:1554112
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    References listed on IDEAS

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