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Do corporate income tax cuts decrease labor share? Regression discontinuity evidence from China

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  • Li, Bing
  • Liu, Chang
  • Sun, Stephen Teng

Abstract

Recent years have seen a sustained decline in the labor share around the world. This paper studies this trend by focusing on the effect of corporate income taxes on firm-level labor shares. From 2010 to 2013, the Chinese central government cut the corporate income tax rate in 21 cities for service firms whose revenue from outsourcing services offshore surpassed half of their total revenue. Leveraging a regression discontinuity design with proprietary administrative data, we find that a one percentage point decrease in the statutory corporate income tax rate induces a one percentage point decrease in the firm-level labor share. Firms respond to the tax cut by increasing their physical capital and bank borrowing while keeping their employment unchanged, consistent with a capital deepening process documented in recent theoretical models. Our results suggest that falling corporate income taxes could have contributed to the global decline in the labor share.

Suggested Citation

  • Li, Bing & Liu, Chang & Sun, Stephen Teng, 2021. "Do corporate income tax cuts decrease labor share? Regression discontinuity evidence from China," Journal of Development Economics, Elsevier, vol. 150(C).
  • Handle: RePEc:eee:deveco:v:150:y:2021:i:c:s0304387821000018
    DOI: 10.1016/j.jdeveco.2021.102624
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