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Notching R&D Investment with Corporate Income Tax Cuts in China


  • Zhao Chen
  • Zhikuo Liu
  • Juan Carlos Suárez Serrato
  • Daniel Yi Xu


We study a Chinese policy that awards substantial tax cuts to firms with R&D investment over a threshold, or notch. Quasi-experimental variation and administrative tax data show that firms significantly increase reported R&D, and that relabeling of expenses accounts for 30% of this increase. Accounting for relabeling is crucial to obtain unbiased estimates of the productivity effects of real R&D and to quantify the fiscal costs of stimulating R&D. We estimate a 9.8% productivity-to-R&D elasticity using a structural model of investment and relabeling. Policy simulations show that selection into the program and relabeling costs determine the cost-effectiveness of stimulating R&D.

Suggested Citation

  • Zhao Chen & Zhikuo Liu & Juan Carlos Suárez Serrato & Daniel Yi Xu, 2018. "Notching R&D Investment with Corporate Income Tax Cuts in China," NBER Working Papers 24749, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24749
    Note: DEV IO PE PR

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    Cited by:

    1. Alexander M. Bell & Raj Chetty & Xavier Jaravel & Neviana Petkova & John Van Reenen, 2019. "Do Tax Cuts Produce More Einsteins? The Impacts of Financial Incentives vs. Exposure to Innovation on the Supply of Inventors," NBER Working Papers 25493, National Bureau of Economic Research, Inc.
    2. Nicholas Bloom & John Van Reenen & Heidi Williams, 2019. "A Toolkit of Policies to Promote Innovation," Journal of Economic Perspectives, American Economic Association, vol. 33(3), pages 163-184, Summer.
    3. Zhao, Chuanmin & Qu, Xi & Luo, Shougui, 2019. "Impact of the InnoCom program on corporate innovation performance in China: Evidence from Shanghai," Technological Forecasting and Social Change, Elsevier, vol. 146(C), pages 103-118.
    4. Emmanuel Chavez, 2020. "The Effects of R&D Tax Credits and Subsidies on Private R&D in Mexico," Working Papers halshs-02652063, HAL.
    5. Shao, Yuchen & Xiao, Chengrui, 2019. "Corporate tax policy and heterogeneous firm innovation: Evidence from a developing country," Journal of Comparative Economics, Elsevier, vol. 47(2), pages 470-486.
    6. Pei Sun & Ziliang Deng & Mike Wright, 0. "Partnering with Leviathan: The politics of innovation in foreign-host-state joint ventures," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 0, pages 1-26.
    7. Liu, Huiling & Fei, Xing & Yakshtas, Kseniya & Li, Bo, 2018. "Does the high-tech enterprise certification policy promote innovation in China?," Economics Discussion Papers 2018-85, Kiel Institute for the World Economy (IfW).

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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