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How Distortive Are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT

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  • Jing Xing
  • Katarzyna Anna Bilicka
  • Xipei Hou

Abstract

In this paper, we investigate distortions created by turnover taxes. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for some service industries in China, while the taxation of manufacturing industries remained unchanged. The reform increased sales, R&D investment, and employment for affected service firms, which is primarily driven by outsourcing from downstream manufacturing _rms. We document that smaller and less innovative manufacturing firms outsource more, and reallocation increases the quality of innovation for affected service firms. Our study provides new evidence on the negative impact of turnover taxes imposed on business inputs.

Suggested Citation

  • Jing Xing & Katarzyna Anna Bilicka & Xipei Hou, 2022. "How Distortive Are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT," CESifo Working Paper Series 9511, CESifo.
    • Handle: RePEc:ces:ceswps:_9511
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    References listed on IDEAS

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    Cited by:

    1. Garriga, Pablo & Tortarolo, Dario, 2024. "Firms as tax collectors," Journal of Public Economics, Elsevier, vol. 233(C).

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing

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