Working Paper: NBER ID: w17532
Authors: Jing Cai; Ann Harrison
Abstract: We explore the impact of a tax reform in some provinces of China which eliminated the value-added tax on some investment goods. While the goal of the experiment was to encourage upgrading of technology, our results suggest that there was no evident increase overall in fixed investment, and employment fell significantly in the treated provinces and sectors. The reform reduced the total number of employees for all types of firms. For domestic firms, it reduced employment by almost 8%. Our results are robust to a variety of approaches, and suggest that the primary impact of the policy has been to induce labor-saving growth. This experiment has since been extended to the rest of China.
Keywords: Value-Added Tax; China; Firm Behavior; Employment; Investment
JEL Codes: F21; F23; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| VAT reform (H25) | reduction in VAT payments (H25) |
| reduction in VAT payments (H25) | decrease in employment (J63) |
| VAT reform (H25) | decrease in employment (J63) |
| reduction in VAT payments (H25) | shift towards machinery investment (E22) |
| VAT reform (H25) | shift towards machinery investment (E22) |
| shift towards machinery investment (E22) | no significant increase in total volume of investment (F21) |
| VAT reform (H25) | labor-saving growth (O49) |
| VAT reform (H25) | no improvement in total factor productivity (TFP) (O49) |
| VAT reform (H25) | reduction in export intensity for most firms (F14) |