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How Do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China
Yongzheng Liu and Jie Mao
American Economic Journal: Economic Policy. Aug 2019, Vol. 11, No. 3: Pages 261-291

How Do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China

Yongzheng Liu1 and Jie Mao2

1School of Finance, China Financial Policy Research Center, Renmin University of China, No. 59 Zhongguancun Street, Haidian District, Beijing, China (email: )

2School of International Trade and Economics, University of International Business and Economics, No. 10, Huixin Dongjie, Chaoyang District, Beijing, China (email: )

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 percent and 8.9 percent, respectively. We also show that the positive effects tend to be strengthened for firms with financial constraints. (JEL D24, D25, G31, H25, O25, P31, P35)