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Skill biased tax policy change: Labor market effects of China’s VAT reform

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  • Li, Hongbin
  • Meng, Lingsheng

Abstract

This paper empirically investigates the labor market effects of China’s 2007 VAT reform, which significantly reduced the tax cost of capital investment. Employing city-by-year variation in the reform, we demonstrate that the tax cuts increased the earnings of skilled workers and left the earnings of the unskilled workers unaffected. Moreover, we find limited impacts of the reform on employment for both skill groups. These results suggest that the tax incentives increased the relative demand for skills, thus resulting in a higher income inequality between skilled and unskilled workers.

Suggested Citation

  • Li, Hongbin & Meng, Lingsheng, 2022. "Skill biased tax policy change: Labor market effects of China’s VAT reform," Labour Economics, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:labeco:v:78:y:2022:i:c:s092753712200104x
    DOI: 10.1016/j.labeco.2022.102213
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    More about this item

    Keywords

    VAT; Labor market; Inequality; China;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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