Value-added tax rate reduction and enterprise ESG performance: An empirical study based on China's tax system reform

ABSTRACT Against the backdrop of global sustainable development initiatives, understanding how tax policies influence enterprise ESG performance has become crucial for policymakers. This study examines the impact of value-added tax (VAT) rate reduction on enterprise ESG performance, exploiting China's 2018-2019 VAT reform as a quasi-natural experiment. Using a Difference-in-Differences (DID) model with data from Chinese A-share listed enterprises spanning 2016-2021, we find that VAT rate reduction significantly improves enterprise ESG performance in the short-to-medium term. The results remain robust after a series of robustness checks, including parallel trends tests, placebo tests, propensity score matching, alternative sample periods, controlling for concurrent policies, and alternative measurements of both the explanatory and explained variables. Mechanism analysis reveals that the policy effect operates through four channels: enhancing operating profit margins, promoting fixed-asset investment upgrading, reducing financing costs, and stimulating green innovation. Heterogeneity analysis further demonstrates that the effect is more pronounced in polluting industries, enterprises positioned in the midstream segment of the value chain, non-state-owned enterprises, enterprises facing tighter financing constraints, larger enterprises, enterprises operating in highly concentrated industries, and enterprises with lower market power. These findings extend the research on tax policy-ESG relationships from environmental protection taxes and income taxes to turnover taxes, providing empirical evidence for designing tax systems that promote enterprise ESG development.