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This research aims to evaluate how tax incentives influence investment and productivity at the firm level in China.

July 30, 2019Open Access

How Do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China

Key Points

This research aims to evaluate how tax incentives influence investment and productivity at the firm level in China.
Utilized a unique firm-level dataset from 2005 to 2012
Employed a quasi-experimental design to compare treated and control firms
Analyzed impacts of permanent tax incentives introduced during capital taxation reform
The reform increased investment by 38.4% in treated firms compared to controls
Firms’ productivity improved by 8.9% relative to control firms
Effects were more pronounced for firms facing financial constraints.

Abstract

China initiated a major reform for capital taxation in 2004. Completed in 2009, it introduced permanent tax incentives for firms’ investment in fixed assets. We explore a unique firm-level dataset from years 2005–2012 and utilize a quasi-experimental design to test the impacts of the reform on firms’ investment and productivity. We find that, on average, the reform raised investment and productivity of the treated firms relative to the control firms by 38.4 percent and 8.9 percent, respectively. We also show that the positive effects tend to be strengthened for firms with financial constraints. (JEL D24, D25, G31, H25, O25, P31, P35)

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