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    Bank of Finland, Rauhankatu 19 B, Helsinki

Yongzheng Liu (Renmin University) - How do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China

Abstract

China initiated a major reform for capital taxation in 2004. Completed in 2009, it introduced permanent tax incentives for firms' investment in fixed assets. We use a quasi-experimental design and a unique firm-level covering all sizes of firms across a broad range of sectors and regions from years 2005-2012, to test whether the reform promoted firms' investment and productivity. We find that on average, the reform raised investment and productivity of the treated firms relative to the control firms by 38.4% and 8.9%, respectively. We also show that the positive effects tend to be strengthened for firms with financial constraints.

 

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