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Corporate Tax Cuts for Small Firms: What Do Firms Do?

Author

Listed:
  • Wei Cui
  • Mengying Wei
  • Weisi Xie
  • Jing Xing

Abstract

What do small firms do when given a semi-permanent corporate income tax cut? We examine firm responses to a substantial reduction in the tax rate for small- and micro-profit enterprises (SMPE) in China, using gradual increases in the qualifying threshold during 2010-2016 for identification. Based on confidential tax returns, we find that newly qualified SMPEs with immediate tax savings increased investment and productivity, while there was no change in wages or payout to shareholders. There is some weak evidence the tax cut induced entry of micro-sized firms in financially constrained sectors. Yet its size-based design led to bunching and incen-tivized firms to slow down growth when they approached the size threshold.

Suggested Citation

  • 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.
    • Handle: RePEc:ces:ceswps:_9389
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    References listed on IDEAS

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    Keywords

    corporate tax; small businesses; investment; productivity; firm entry;
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