China's VAT Reform and Its Effects on Enterprises' Tax Burden and Innovation

Haibo Feng (1) , Sheng Liu (2) , Fei Xu (3)

1 Jinan University [Guangzhou]
2 Guangdong University of Foreign Studies
3 ECON - Département d'économie (Sciences Po)

The impact of China's value-added tax (VAT) reform on enterprise innovation is the result of a combination of tax cuts and various endogenous incentives. In this study, we find evidence that China' s VAT reform largely reduced the tax burden of firms but had a differing impact on the manufacturing and service industries. The tax burden on manufacturing enterprises dropped significantly, but the burden on the service industry did not change markedly. Furthermore, China's VAT reform also had a significant positive impact on corporate innovation in both the service and manufacturing industries. However, these effects were significantly greater on the manufacturing industry. Meanwhile, China's VAT reform did not alleviate the tax burden on all enterprises. For enterprises facing an increased burden of tax, the reform can help stimulate enterprise innovation if the enterprise has sufficient capital, whereas the impact coefficient and significance level are considerably lower than that for enterprises in which the tax burden had reduced. If an enterprise has insufficient capital, VAT reform has little effect on enterprise innovation. Finally, we show that China's VAT reform exerted different influences on the innovation behaviour of heterogeneous enterprises.

Keywords: China's VAT reform; Tax Burden; Innovation; Corporate Heterogeneity

Domains: Economics and Finance

Haibo Feng, Sheng Liu, Fei Xu. China's VAT Reform and Its Effects on Enterprises' Tax Burden and Innovation. 2019. ⟨hal-04066831⟩