Tax Rate-based Incentives, Tax Base-based Incentives, and the Combined Policy Effects on Corporate Innovation

Tax incentive policies are an important means for governments to encourage corporate innovation. The issue of policy composite fallacy exists under certain conditions, which has been overlooked by existing studies. Based on China's tax survey data from 2008 to 2016 and employing the method of constructing the marginal effective tax rate for enterprises, this paper empirically tests the effects of tax rate-based incentives, tax base-based incentives, and their combined policy effects. The following findings are obtained: tax base-based incentives consistently promote corporate innovation through the innovation risk-sharing mechanism. Whether tax rate-based incentives promote innovation depends on the extent to which the expectation of compensating for innovation risk loss through tax rate incentives is met. The combined policy effect of tax base- and tax rate-based incentives also depends on the level of government risk-sharing and the expectation of compensation for corporate innovation risk loss, with empirical results showing that the combination of the two policies impedes corporate innovation; compared with tax rate-based incentives and their combination, tax base-based incentives have a greater and more lasting impact in terms of lagged effects. Finally, the paper conducts a heterogeneity analysis on enterprises with different levels of innovation and different property rights. The conclusions of the article provide theoretical and practical bases for optimizing the combination of tax incentive policies and improving the quality of innovation.