The impact of factor tax structure on firm innovation: evidence from China

Labor and capital are two of the most fundamental factors of production, and the ratio of labor to capital tax can reflect the structure of factor tax. Despite the existing literature demonstrating the impact of taxation on enterprise innovation, few studies have addressed the effect of changes in factor tax structure on enterprise innovation. Using provincial tax data and listed company data from China between 2006 and 2017, this study empirically tests the impact of factor tax structure on enterprise innovation using the Poisson quasi-linear method. The findings indicate that a higher share of labor tax and a lower share of capital tax tend to inhibit enterprise innovation. Conversely, a higher tax compliance rate for labor tax and a lower compliance rate for capital tax are also unfavorable to enterprise innovation. A non-linear relationship is observed between factor tax structure and enterprise innovation, where a higher share of labor tax and a lower share of capital tax can promote enterprise innovation when exceeding a specific limit. The results of this study have theoretical and practical implications for improving factor tax structure, stimulating enterprise innovation, and promoting economic transformation toward higher quality.