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Unintended consequences of tax incentives on firms' human capital composition: Evidence from China

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  • Zhao, Zhiqi
  • Yue, Yong
  • Wang, Wangshuai

Abstract

This paper investigates the unintended effects of tax incentives on firms' human capital composition. By exploring data on A-share listed firms from 2015 to 2020 and utilizing a quasi-experimental design, we examine the impact of the 2018 value-added tax (VAT) credit refund policy on the human capital composition of firms' workforce. We find that treated firms increased the ratio of R&D employees by 0.61% relative to control firms. The incentive effect is more pronounced for firms in modern service sectors, mature firms, non-state-owned firms, and firms located in eastern regions. The mechanism reveals that the VAT policy, by refunding tax credits to pilot firms, alleviated internal financing constraints and prompted firms to increase investments in fixed assets and R&D expenditures. This enhanced the firms' human capital structure. Our study provides a novel perspective on how tax incentives unintentionally affect firms' human capital composition while also providing insights into further refining China's VAT credit-refund system in the post-COVID era.

Suggested Citation

  • Zhao, Zhiqi & Yue, Yong & Wang, Wangshuai, 2024. "Unintended consequences of tax incentives on firms' human capital composition: Evidence from China," China Economic Review, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:chieco:v:84:y:2024:i:c:s1043951x24000270
    DOI: 10.1016/j.chieco.2024.102138
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    More about this item

    Keywords

    VAT credit refund; Human capital composition; Unintended effect;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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