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The Impact of Corporate Taxes on Firm Innovation: Evidence from the Corporate Tax Collection Reform in China

Author

Listed:
  • Jing Cai
  • Yuyu Chen
  • Xuan Wang

Abstract

This paper exploits a tax reform on manufacturing firms in China to study the impact of taxes on firm innovation. The reform switched the corporate income tax collection from the local to the state tax bureau and reduced the effective tax rate by 10%. The reform only applied to firms established after January 2002, allowing us to use regression discontinuity design as the identification strategy. The results show that lower taxes improved both quantity and quality of firm innovation. Moreover, the reform has a bigger impact on firms that are financially constrained and firms that engage more in tax evasion.

Suggested Citation

  • Jing Cai & Yuyu Chen & Xuan Wang, 2018. "The Impact of Corporate Taxes on Firm Innovation: Evidence from the Corporate Tax Collection Reform in China," NBER Working Papers 25146, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25146
    Note: DEV PE PR
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    Cited by:

    1. Jingxian Zou & Guangjun Shen, 2023. "The impact of tax policy on firm debt maturity: Evidence from China's VAT reform," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(2), pages 295-317, April.
    2. Oliver Falck & Anna Kerkhof & Christian Pfaffl, 2023. "Taxation and Innovation: How R&D Tax Credit Schemes Foster Innovation in the Private Sector," EconPol Forum, CESifo, vol. 24(04), pages 61-66, July.
    3. Fengfei Li & Tse‐Chun Lin, 2022. "Innovative firms’ cash holdings, tax policies, and institutional environments," Financial Management, Financial Management Association International, vol. 51(3), pages 869-902, September.
    4. Pan, Xia & Cheng, Wenyin & Gao, Yuning, 2022. "The impact of privatization of state-owned enterprises on innovation in China: A tale of privatization degree," Technovation, Elsevier, vol. 118(C).
    5. Xiaowei Kong & Deng-Kui Si & Haiyang Li & Dongmin Kong, 2021. "Does access to credit reduce SMEs’ tax avoidance? Evidence from a regression discontinuity design," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-23, December.
    6. Jin, Xin & Zhang, Min & Sun, Guanghua & Cui, Lixin, 2022. "The impact of COVID-19 on firm innovation: Evidence from Chinese listed companies," Finance Research Letters, Elsevier, vol. 45(C).
    7. Zhu, Xiaoyang & Asimakopoulos, Stylianos & Kim, Jaebeom, 2020. "Financial development and innovation-led growth: Is too much finance better?," Journal of International Money and Finance, Elsevier, vol. 100(C).
    8. Shuai Wang & Fayyaz Ahmad & Yanlong Li & Nabila Abid & Abbas Ali Chandio & Abdul Rehman, 2022. "The Impact of Industrial Subsidies and Enterprise Innovation on Enterprise Performance: Evidence from Listed Chinese Manufacturing Companies," Sustainability, MDPI, vol. 14(8), pages 1-17, April.
    9. Wilman Gómez & Carlos Esteban Posada & Remberto Rhenals, 2018. "Determinants of Total Factor Productivity: The cases of the main Latin American and emerging economies of Asia (1960 - 2015)," Documentos de Trabajo de Valor Público 17081, Universidad EAFIT.
    10. Liu, Guanchun & Liu, Yuanyuan & Zhang, Chengsi, 2022. "Tax enforcement and corporate employment: Evidence from a quasi-natural experiment in China," China Economic Review, Elsevier, vol. 73(C).
    11. Xia Pan & Yuning Gao & Dong Guo & Wenyin Cheng, 2020. "Does Higher Education Promote Firm Innovation in China?," Sustainability, MDPI, vol. 12(18), pages 1-14, September.
    12. Xiaoyang Zhu, 2022. "Corporate tax competition and innovation: An inverted-U relationship," Economics Bulletin, AccessEcon, vol. 42(2), pages 447-457.
    13. Aldieri, Luigi & Makkonen, Teemu & Paolo Vinci, Concetto, 2020. "Environmental knowledge spillovers and productivity: A patent analysis for large international firms in the energy, water and land resources fields," Resources Policy, Elsevier, vol. 69(C).
    14. Huasheng Song & Guili Sun, 2022. "Investment Promotion, Tax Competition, and Industrial Land Price in China—Evidence from the Corporate Tax Collection Reform," Land, MDPI, vol. 11(5), pages 1-17, May.
    15. Chen, Yongmin & Jiang, Haiwei & Liang, Yousha & Pan, Shiyuan, 2022. "The impact of foreign direct investment on innovation: Evidence from patent filings and citations in China," Journal of Comparative Economics, Elsevier, vol. 50(4), pages 917-945.
    16. Hongsheng Fang & Yunqing Su & Weijun Lu, 2022. "Tax incentive and firm investment: Evidence from the Income Tax Revenue Sharing Reform in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(5), pages 4849-4884, December.
    17. Fang, Hongsheng & Su, Yunqing & Lu, Weijun, 2022. "Tax incentive and corporate financial performance: Evidence from income tax revenue sharing reform in China," Journal of Asian Economics, Elsevier, vol. 81(C).
    18. Hedy Jiaying Huang & Ahsan Habib & Sophia Li Sun & Ying Liu & Huiting Guo, 2021. "Financial reporting and corporate innovation: a review of the international literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5439-5499, December.
    19. Feng, Chen & Ye, Yongwei & Bai, Caiquan, 2023. "Tax enforcement and corporate financial irregularities: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 88(C).
    20. Hung Quang Doan & Nam Hoang Vu & Binh Tran-Nam & Ngoc-Anh Nguyen, 2022. "Effects of tax administration corruption on innovation inputs and outputs: evidence from small and medium sized enterprises in Vietnam," Empirical Economics, Springer, vol. 62(4), pages 1773-1800, April.
    21. Antonio Estache & Beni Kouevi Gath, 2019. "Corporate Income Taxes and (Un-)Employment in the OECD," Working Papers ECARES 2019-11, ULB -- Universite Libre de Bruxelles.
    22. Xiang, Junyi & Zhu, Ling & Kong, Dongmin, 2023. "Labor cost and corporate tax avoidance," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 338-358.
    23. Li, Bing & Liu, Chang & Sun, Stephen Teng, 2021. "Do corporate income tax cuts decrease labor share? Regression discontinuity evidence from China," Journal of Development Economics, Elsevier, vol. 150(C).
    24. Feng, Chen & Ye, Yongwei & Tao, Yunqing, 2022. "Tax Authority Enforcement and Corporate Social Security Contributions: Evidence from China," Finance Research Letters, Elsevier, vol. 49(C).

    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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