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Adjustments in VAT rates and business innovation: Empirical insights from China

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  • Liu, Xiufen
  • Yu, Weizhen
  • Chen, Zixuan

Abstract

China aims to alleviate corporate financial pressures and encourage high-quality economic development through initiatives such as value-added tax (VAT) rate reform. This study employs the difference-in-difference (DID) approach to investigate the effect of the 2017 VAT rate reform on corporate innovation, taking the reform as a quasi-natural experiment. We find that the VAT rate reform has significantly promoted firm innovation and that increasing profitability serves as the primary channel. The innovation-promoting effects of the VAT rate reform are most prominently seen in a number of different types of businesses: those with lower intermediate input ratios, those operating in less monopolistic industry environments, state-owned enterprises, non-exporting businesses, entities with limited financial resources, and companies located in non-eastern China. This study makes a case for tax reforms in other nations as well as a reference for China's market-oriented reform and further VAT reform.

Suggested Citation

  • Liu, Xiufen & Yu, Weizhen & Chen, Zixuan, 2024. "Adjustments in VAT rates and business innovation: Empirical insights from China," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 659-672.
    • Handle: RePEc:eee:reveco:v:93:y:2024:i:pb:p:659-672
    DOI: 10.1016/j.iref.2024.05.012
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    More about this item

    Keywords

    VAT rates; R&D; Tax burden; Corporate innovation;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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