How do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China
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Yongzheng Liu
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Jie Mao
- American Economic Journal: Economic Policy (Forthcoming)
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% and 8.9%, respectively. We also show that the positive effects tend to be strengthened for firms with financial constraints.
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