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The impact of VAT input tax refund policy on firms’ labor income share: Evidence from China

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  • Yang, Guang-Zhao
  • Si, Deng-Kui

Abstract

This study examines the impact of China’s 2018 VAT input tax credit refund policy on the labor income share within enterprises. Using panel data from Chinese listed companies between 2014 and 2022, we find that the policy increased the labor income share by approximately 0.8 percentage points. The reform reduced industry concentration and improved firms’ access to external financing. The effects were more pronounced among private firms, financially constrained firms, high-productivity enterprises, and labor-intensive sectors. In addition, the policy stimulated greater R&D investment and output, accompanied by increased hiring of technical personnel. While average employee compensation rose, executive pay grew at an even faster rate, indicating a potential widening of intra-firm wage inequality. The policy also contributed to overall employment expansion. These findings suggest that the VAT refund policy positively affected labor income distribution, with broader implications for corporate investment behavior and internal wage structures.

Suggested Citation

  • Yang, Guang-Zhao & Si, Deng-Kui, 2025. "The impact of VAT input tax refund policy on firms’ labor income share: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 86(C), pages 2233-2246.
    • Handle: RePEc:eee:ecanpo:v:86:y:2025:i:c:p:2233-2246
    DOI: 10.1016/j.eap.2025.05.054
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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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