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The Value-Added Tax Reform Puzzle

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  • Jing Cai
  • Ann Harrison

Abstract

We explore the impact of a tax reform in some provinces of China which eliminated the value-added tax on some investment goods. While the goal of the experiment was to encourage upgrading of technology, our results suggest that there was no evident increase overall in fixed investment, and employment fell significantly in the treated provinces and sectors. The reform reduced the total number of employees for all types of firms. For domestic firms, it reduced employment by almost 8%. Our results are robust to a variety of approaches, and suggest that the primary impact of the policy has been to induce labor-saving growth. This experiment has since been extended to the rest of China.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17532.

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Date of creation: Oct 2011
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Handle: RePEc:nbr:nberwo:17532

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  1. Nada Eissa, 1995. "Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural Experiment," NBER Working Papers 5023, National Bureau of Economic Research, Inc.
  2. Sourafel Girma & Holger Görg, 2006. "Evaluating the foreign ownership wage premium using a difference-indifferences matching approach," The Institute for International Integration Studies Discussion Paper Series iiisdp165, IIIS.
  3. Mertens, Karel & Ravn, Morten O., 2009. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks," CEPR Discussion Papers 7370, C.E.P.R. Discussion Papers.
  4. Avraham Ebenstein & Ann Harrison & Margaret McMillan & Shannon Phillips, 2009. "Why are American Workers getting Poorer? Estimating the Impact of Trade and Offshoring Using the CPS," NBER Working Papers 15107, National Bureau of Economic Research, Inc.
  5. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 2000. "Income Taxes and Entrepreneurs' Use of Labor," NBER Working Papers 6578, National Bureau of Economic Research, Inc.
  6. Rodrigo Cerda & Felipe Larrain, 2010. "Corporate taxes and the demand for labor and capital in developing countries," Small Business Economics, Springer, vol. 34(2), pages 187-201, February.
  7. Ebenstein, Avraham & Harrison, Ann & McMillan, Margaret & Phillips, Shannon, 2011. "Estimating the impact of trade and offshoring on American workers using the current population surveys," Policy Research Working Paper Series 5750, The World Bank.
  8. Alvaro Bustos & Eduardo Engel & Alexander Galetovic, 2003. "Could Higher Taxes Increase the Long-Run Demand for Capital? Theory and Evidence for Chile"," Working Papers 858, Economic Growth Center, Yale University.
  9. Sascha O. Becker & Andrea Ichino, 2002. "Estimation of average treatment effects based on propensity scores," Stata Journal, StataCorp LP, vol. 2(4), pages 358-377, November.
  10. Ann Harrison & Jason Scorse, 2010. "Multinationals and Anti-sweatshop Activism," American Economic Review, American Economic Association, vol. 100(1), pages 247-73, March.
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