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Tax cuts and enterprises’ R&D intensity: Evidence from a natural experiment in China

Author

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  • Lan, Fei
  • Wang, Wei
  • Cao, Qingzi

Abstract

This paper studies the impact of tax cuts on enterprises’ R&D intensity. We use a natural experiment involving China’s business tax changing to value-added tax (“BT to VAT”) to identify any causality. The results reveal that this tax reform has prompted enterprises to increase their research and development (R&D) investment. Specifically, a stronger ability to transfer tax, results in this change having a more significant promotional effect on enterprises’ R&D intensity. Further analysis demonstrates that firms with different ownership types and in different industries respond differently to the “BT to VAT” policy. Our findings are only significant for non-state-owned and other modern service enterprises. This paper provides a theoretical and empirical basis for detailed analyses of the effects of “BT to VAT” policy, particularly the government’s subsequent improvement to the tax reform policy, to further stimulate enterprise investments in R&D as well as industrial upgrading.

Suggested Citation

  • Lan, Fei & Wang, Wei & Cao, Qingzi, 2020. "Tax cuts and enterprises’ R&D intensity: Evidence from a natural experiment in China," Economic Modelling, Elsevier, vol. 89(C), pages 304-314.
    • Handle: RePEc:eee:ecmode:v:89:y:2020:i:c:p:304-314
    DOI: 10.1016/j.econmod.2019.10.031
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    References listed on IDEAS

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