Working Paper: NBER ID: w24414
Authors: Haichao Fan; Yu Liu; Nancy Qian; Jaya Wen
Abstract: This paper documents that an increase in the enforcement of value-added tax (VAT) caused by the adoption of a new technology significantly increased VAT payments by large manufacturing firms in China. The reform contributed to 27.1% of VAT revenues and 12.9% of total government revenues in the five subsequent years. The main mechanism is likely to be a reduction in VAT deductions. The dynamic effects of the reform suggest that the rise in tax revenues is non-monotonic over time, with large short-run gains and smaller, though still positive, long-run gains. The reform also reduced firm revenues and inputs, and increased productivity.
Keywords: Value-added tax; China; Tax compliance; Digital technology
JEL Codes: H26; H32; O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of digital encryption (K24) | VAT compliance (H26) |
| introduction of digital encryption (K24) | VAT payments (H25) |
| introduction of digital encryption (K24) | government revenues (H29) |
| introduction of digital encryption (K24) | reduction in VAT deductions (H25) |
| introduction of digital encryption (K24) | challenges in falsifying invoices (M48) |
| introduction of digital encryption (K24) | non-monotonic increase in tax revenues (H29) |
| introduction of digital encryption (K24) | decreased firm revenues (D22) |
| introduction of digital encryption (K24) | decreased inputs (D57) |
| introduction of digital encryption (K24) | increased productivity (O49) |