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Does value‐added tax reform boost firms’ domestic value added in exports? Evidence from China

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  • Songbo Wu
  • Yue Lu
  • Xiaofeng Lv

Abstract

We explore the effect of value‐added tax (VAT) on domestic value added in exports where VAT is incorporated into a theoretical model to analyze its distortion on intra‐firm resource allocation. The VAT pilot reform in the three northeast provinces of China in 2004 provided a natural experiment which generated significant effective VAT rate differences due to deduction policies. We utilize the reform as an exogenous shock to identify its effect on the domestic value added ratio (DVAR) in exports at the firm level. Empirical results show that the reform has significantly increased the firms' DVAR by allowing more deduction of fixed asset purchases that lowers the effective VAT rates of the affected firms, which confirm the findings of our conceptual framework. This effect is greater for large and medium‐sized firms than for small and microscale firms. The VAT reform in 2004 has significant effect on the DVAR of state‐owned enterprises and domestic private firms, but not for foreign invested firms. The reform also has higher effect for firms from higher market concentration sectors.

Suggested Citation

  • Songbo Wu & Yue Lu & Xiaofeng Lv, 2021. "Does value‐added tax reform boost firms’ domestic value added in exports? Evidence from China," Review of International Economics, Wiley Blackwell, vol. 29(5), pages 1275-1299, November.
    • Handle: RePEc:bla:reviec:v:29:y:2021:i:5:p:1275-1299
    DOI: 10.1111/roie.12543
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    Cited by:

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    3. Jun Wang & Congcong Liu & Zhuan Xie & Guangjun Shen, 2024. "Tax incentives and corporate innovation: Evidence from China's value‐added tax reform," Contemporary Economic Policy, Western Economic Association International, vol. 42(1), pages 183-202, January.

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