Working Paper: NBER ID: w25146
Authors: Jing Cai; Yuyu Chen; Xuan Wang
Abstract: This paper exploits a tax reform on manufacturing firms in China to study the impact of taxes on firm innovation. The reform switched the corporate income tax collection from the local to the state tax bureau and reduced the effective tax rate by 10%. The reform only applied to firms established after January 2002, allowing us to use regression discontinuity design as the identification strategy. The results show that lower taxes improved both quantity and quality of firm innovation. Moreover, the reform has a bigger impact on firms that are financially constrained and firms that engage more in tax evasion.
Keywords: Corporate Taxes; Firm Innovation; Tax Reform; China
JEL Codes: H25; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decrease in effective corporate tax rate (H32) | increase in average number of patent applications (O39) |
| decrease in effective corporate tax rate (H32) | increase in R&D expenditures (O39) |
| decrease in effective corporate tax rate (H32) | increase in skilled labor ratio (J24) |
| lower tax rates (H29) | alleviation of financial constraints on firms (G32) |
| lower tax rates (H29) | reallocation of resources towards innovation activities (O35) |