Notching R&D Investment with Corporate Income Tax Cuts in China
American Economic Review
vol. 111,
no. 7, July 2021
(pp. 2065-2100)
Abstract
We study a Chinese policy that awards substantial tax cuts to firms with R&D investment over a threshold or "notch." Quasi-experimental variation and administrative tax data show a significant increase in reported R&D that is partly driven by firms relabeling expenses as R&D. Structural estimates show relabeling accounts for 24.2 percent of reported R&D and that doubling R&D would increase productivity by 9 percent. Policy simulations show that firm selection and relabeling determine the cost-effectiveness of stimulating R&D, that notch-based policies are more effective than tax credits when relabeling is prevalent, and that modest spill-overs justify the program from a welfare perspective.Citation
Chen, Zhao, Zhikuo Liu, Juan Carlos Suárez Serrato, and Daniel Yi Xu. 2021. "Notching R&D Investment with Corporate Income Tax Cuts in China." American Economic Review, 111 (7): 2065-2100. DOI: 10.1257/aer.20191758Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- O14 Industrialization; Manufacturing and Service Industries; Choice of Technology
- O32 Management of Technological Innovation and R&D
- P31 Socialist Enterprises and Their Transitions
- P35 Socialist Institutions and Their Transitions: Public Economics