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How well-targeted are payroll tax cuts as a response to COVID-19? evidence from China

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Listed:
  • Wei Cui

    (Allard Law School, University of British Columbia)

  • Jeffrey Hicks

    (University of Toronto)

  • Max Norton

    (Vancouver School of Economics, University of British Columbia)

Abstract

Numerous countries cut payroll taxes in response to COVID-19, including China, which reduced employer contributions by up to 21 percentage points. We use administrative data on more than 800,000 Chinese firms to evaluate payroll tax cuts as a business relief measure. We estimate that the tax cuts cover 31.5% of the decline in business cash flow, but labor informality causes 53% of registered firms-24% of aggregate economic activity-to receive no benefits at all. We quantify the targeting of the policy in terms of how much benefits flow to small firms less able to access external finance and to sectors worse hit by COVID-19. We find that (1) small firms and vulnerable industries are comparatively more labor intensive, which leads to desirable targeting; (2) labor informality worsens, but does not eliminate, targeting by firm size; and (3) labor informality is uncorrelated with the COVID-19 shock, and therefore does not affect targeting by sector.

Suggested Citation

  • Wei Cui & Jeffrey Hicks & Max Norton, 2022. "How well-targeted are payroll tax cuts as a response to COVID-19? evidence from China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(5), pages 1321-1347, October.
    • Handle: RePEc:kap:itaxpf:v:29:y:2022:i:5:d:10.1007_s10797-022-09746-w
    DOI: 10.1007/s10797-022-09746-w
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