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The value-added tax reform puzzle

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  • Cai, Jing
  • Harrison, Ann

Abstract

This explores the impact of a tax reform in some provinces of China which eliminated the value-added tax on some investment goods. While the goal of the experiment was to encourage upgrading of technology, the results suggest that there was no evident increase overall in fixed investment, and employment fell significantly in the treated provinces and sectors. The reform reduced the total number of employees for all types of firms. For domestic firms, it reduced employment by almost 8 percent. The results are robust to a variety of approaches, and suggest that the primary impact of the policy has been to induce labor-saving growth. This experiment has since been extended to the rest of China.

Suggested Citation

  • Cai, Jing & Harrison, Ann, 2011. "The value-added tax reform puzzle," Policy Research Working Paper Series 5788, The World Bank.
    • Handle: RePEc:wbk:wbrwps:5788
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    Cited by:

    1. Qi, Yu & Zhang, Jianshun & Chen, Jianwei, 2023. "Tax incentives, environmental regulation and firms’ emission reduction strategies: Evidence from China," Journal of Environmental Economics and Management, Elsevier, vol. 117(C).
    2. Guo, Yue Mei & Shi, Yun Rui, 2021. "Impact of the VAT reduction policy on local fiscal pressure in China in light of the COVID-19 pandemic: A measurement based on a computable general equilibrium model," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 253-264.
    3. Wang Dehua & Wu Han, 2019. "The Impact of 2009 VAT Reform on Enterprise Investment and Employment – Empirical Analysis Based on Chinese Tax Survey Data," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 5(2), pages 166-176.
    4. Kong, Dongmin & Xiong, Mengxu & Qin, Ni, 2022. "Business Tax reform and CSR engagement: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 82(C).
    5. Liu, Qing & Lu, Yi, 2015. "Firm investment and exporting: Evidence from China's value-added tax reform," Journal of International Economics, Elsevier, vol. 97(2), pages 392-403.
    6. Abhay Aneja & Nirupama Kulkarni & S. K. Ritadhi, 2021. "Consumption Tax Reform and the Real Economy: Evidence From India's Adoption of a Value‐Added Tax," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 18(3), pages 569-602, September.
    7. Zou, Jingxian & Shen, Guangjun & Gong, Yaxian, 2019. "The effect of value-added tax on leverage: Evidence from China’s value-added tax reform," China Economic Review, Elsevier, vol. 54(C), pages 135-146.
    8. Wang D., 2013. "The impact of the 2009 value added tax reform on enterprise investment and employment ‐ Empirical analysis based on Chinese tax survey data," MERIT Working Papers 2013-059, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    9. Jiří Schwarz & Martin Pospíšil, 2018. "Bankruptcy, Investment, and Financial Constraints: Evidence from the Czech Republic," Eastern European Economics, Taylor & Francis Journals, vol. 56(2), pages 99-121, March.
    10. Zhang, Yan & Bai, Zhuoran & Findaly, Christopher, 2021. "Value-added Tax Reform and Services Exports: Evidence from China," MPRA Paper 111184, University Library of Munich, Germany, revised 2021.
    11. Yan Du & Mengkai Yang & Jing Li & Yunong Li, 2020. "The Stagnant Export Upgrading in Northeast China: Evidence from Value‐added Tax Reform," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 28(4), pages 101-126, July.
    12. Li, Jing & Shi, Xing & Wu, Huaqing & Liu, Liwen, 2020. "Trade-off between economic development and environmental governance in China: An analysis based on the effect of river chief system," China Economic Review, Elsevier, vol. 60(C).
    13. Jiayi Du & Guangjun Shen & Jingxian Zou, 2023. "Tax incentives and firm financing structures: evidence from China’s accelerated depreciation policy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(5), pages 1346-1373, October.
    14. Lei Zhang & Yuyu Chen & Zongyan He, 2018. "The effect of investment tax incentives: evidence from China’s value-added tax reform," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 913-945, August.
    15. Abhay Aneja & Nirupama Kulkarni & S.K. Ritadhi, 2021. "Consumption Tax Reform and the Real Economy: Evidence from India’s Adoption of a Value-Added Tax," Working Papers 48, Ashoka University, Department of Economics.

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    More about this item

    Keywords

    Taxation&Subsidies; Investment and Investment Climate; Debt Markets; Emerging Markets; Economic Theory&Research;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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