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Cash on the table? Imperfect take-up of tax incentives and firm investment behavior

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  • Cui, Wei
  • Hicks, Jeffrey
  • Xing, Jing

Abstract

We investigate whether investment incentives work in less developed countries by exploiting the introduction of accelerated depreciation (AD) for fixed asset investment in China as a natural experiment. In contrast to the large positive impact of similar tax incentives in the U.S. and U.K. found in recent studies, we document that AD was ineffective in stimulating Chinese firms’ investment. Further, using confidential corporate tax returns from a large province, we find that firms fail to claim the AD benefit on over 80% of eligible investments. Firms’ take-up is significantly influenced by their taxable positions and tax sophistication. Moreover, resources of local tax authorities help improve awareness of the policy. Our study contributes to the understanding of conditions under which tax incentives for investment can be effective.

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  • Cui, Wei & Hicks, Jeffrey & Xing, Jing, 2022. "Cash on the table? Imperfect take-up of tax incentives and firm investment behavior," Journal of Public Economics, Elsevier, vol. 208(C).
    • Handle: RePEc:eee:pubeco:v:208:y:2022:i:c:s0047272722000342
    DOI: 10.1016/j.jpubeco.2022.104632
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    Cited by:

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    2. Jing Xing & Katarzyna Anna Bilicka & Xipei Hou, 2022. "How Distortive Are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT," CESifo Working Paper Series 9511, CESifo.
    3. HONDA Tomohito & HOSONO Kaoru & MIYAKAWA Daisuke & ONO Arito & UESUGI Iichiro, 2024. "Imperfect Take-up of COVID-19 Business Support Programs," Discussion papers 24001, Research Institute of Economy, Trade and Industry (RIETI).
    4. Qianbin Feng & Lexin Zhao & Mingxue Xu, 2023. "Tax Incentives and Maturity Mismatch between Investment and Financing: Evidence from China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(4), pages 1-36, July.
    5. Wei Cui & Mengying Wei & Weisi Xie & Jing Xing, 2021. "Corporate Tax Cuts for Small Firms: What Do Firms Do?," CESifo Working Paper Series 9389, CESifo.
    6. ORIHARA Masanori & SUZUKI Takafumi, 2021. "Windfalls? Costs and Benefits of Investment Tax Incentives due to Financial Constraints," Discussion papers 21087, Research Institute of Economy, Trade and Industry (RIETI).
    7. James Alm & Kay Blaufus & Martin Fochmann & Erich Kirchler & Peter N. C. Mohr & Nina E. Olson & Benno Torgler, 2020. "Tax Policy Measures to Combat the SARS-CoV-2 Pandemic and Considerations to Improve Tax Compliance: A Behavioral Perspective," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 76(4), pages 396-428.
    8. Tang, Meili & Wang, Yu, 2022. "Tax incentives and corporate social responsibility: The role of cash savings from accelerated depreciation policy," Economic Modelling, Elsevier, vol. 116(C).
    9. Wei Cui & Jeffrey Hicks & Max Norton, 2022. "How well-targeted are payroll tax cuts as a response to COVID-19? evidence from China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(5), pages 1321-1347, October.

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    More about this item

    Keywords

    Tax incentives; Investment; Take-up; Tax administration;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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