Working Paper: NBER ID: w24749
Authors: Zhao Chen; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Yi Xu
Abstract: We study a Chinese policy that awards substantial tax cuts to firms with R&D investment over a threshold or “notch.” Quasi-experimental variation and administrative tax data show a significant increase in reported R&D that is partly driven by firms relabeling expenses as R&D. Structural estimates show relabeling accounts for 24.2% of reported R&D and that productivity increases by 9% when real R&D doubles. Policy simulations show firm selection and relabeling determine the cost-effectiveness of stimulating R&D, that notch-based policies are more effective than tax credits when relabeling is prevalent, and that modest spillovers justify the program from a welfare perspective.
Keywords: R&D investment; corporate income tax; China; tax incentives; productivity
JEL Codes: H20; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| innocom program (O31) | reported R&D (O32) |
| relabeling of expenses (M41) | reported R&D (O32) |
| reported R&D (O32) | productivity (O49) |
| innocom program (O31) | productivity (O49) |
| relabeling of expenses (M41) | productivity (O49) |
| innocom program (O31) | effectiveness of R&D investment (O36) |