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The effect of investment tax incentives: evidence from China’s value-added tax reform

Author

Listed:
  • Lei Zhang

    (Shanghai Jiao Tong University)

  • Yuyu Chen

    (Peking University)

  • Zongyan He

    (Shanghai Shenyin & Wanguo Securities Research Co. Ltd)

Abstract

We estimate the impact of investment tax credit on firm fixed investment in a difference-in-differences-in-differences framework, using China’s 2004 value-added tax reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the Northeastern region. The tax credit raises significantly fixed investment of eligible firms by 28% on average during 2004–2007 relative to 2001–2003, corresponding to a user cost elasticity of 1.84. The tax incentive has larger effects on firms that are less financially constrained such as smaller firms and firms with a larger cash flow. The result is largely driven by responses of domestic private firms and is robust to specifications addressing the issue of anticipation.

Suggested Citation

  • Lei Zhang & Yuyu Chen & Zongyan He, 2018. "The effect of investment tax incentives: evidence from China’s value-added tax reform," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 913-945, August.
    • Handle: RePEc:kap:itaxpf:v:25:y:2018:i:4:d:10.1007_s10797-017-9475-y
    DOI: 10.1007/s10797-017-9475-y
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    More about this item

    Keywords

    Firm fixed investment; Investment tax credit; Value-added tax reform; China;
    All these keywords.

    JEL classification:

    • 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
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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