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.
Liu, Yongzheng, and Jie Mao.
"How Do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China."
American Economic Journal: Economic Policy,
Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
Intertemporal Firm Choice: Investment, Capacity, and Financing
Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
Business Taxes and Subsidies including sales and value-added (VAT)
Socialist Enterprises and Their Transitions
Socialist Institutions and Their Transitions: Public Economics