Working Paper: CEPR ID: DP16886
Authors: Katarzyna Bilicka; Jing Xing; Xipei Hou
Abstract: In this paper, we investigate distortions created by turnover taxes. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for some service industries in China, while the taxation of manufacturing industries remained unchanged. The reform increased sales, R&D investment, and employment for affected service firms, which is primarily driven by outsourcing from downstream manufacturing firms. We document that smaller and less innovative manufacturing firms outsource more, and reallocation increases the quality of innovation for affected service firms. Our study provides new evidence on the negative impact of turnover taxes imposed on business inputs.
Keywords: Turnover Tax; Value-Added Tax; Outsourcing; R&D Investment
JEL Codes: H25; H32; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Removal of turnover taxes (H25) | Increased sales (M31) |
| Increased sales (M31) | Higher R&D investment (O39) |
| Increased sales (M31) | Higher employment (J68) |
| Outsourcing from smaller, less innovative manufacturing firms (L24) | Enhanced innovation quality in service firms (O31) |