Technological Adoption and Taxation: The Case of China’s Golden Tax Reform

This paper investigates the effect of Phase 2 of the Golden Tax Project on the value-added tax (VAT) in China. The reform introduced computer-generated invoices and electronic transaction linking. Using a difference-in-differences strategy, we show that the reform increased VAT by reducing exaggerated VAT deductions. The introduction of the new digital technology had large positive effects on Chinese fiscal capacity. VAT gains from the reform explain approximately 13.7% of VAT growth during 1998–2007.