China’s Value-Added Tax Reform, Firm Behavior, and Performance

Frontiers of Economics in China, Vol. 5, No. 3, pp. 445-463, 2010

19 Pages Posted: 21 Nov 2010  

Huihua Nie

Renmin University of China - School of Economics

Mingyue Fang

Renmin University of China - School of Economics

Tao Li

University of London - School of Oriental and African Studies (SOAS)

Date Written: November 21, 2010

Abstract

China reformed value-added tax (VAT) by removing investment from the tax base in northeastern provinces in 2004, which is a “natural experiment” of its tax system. Using difference-in-differences method, this paper for the first time investigates the impact of VAT reform on China firms’ fixed asset investment, employment behavior, innovative activities, and productivity, and furthermore discusses the impact of firm behavior on industrial structural upgrade and employment with a firm-level panel data of large and medium-sized manufacturing enterprises in China. We find that VAT reform significantly promotes firms’ fixed asset investment, and increases firms’ capital-labor ratio and productivity; while enhancement of firms’ productivity is mainly achieved by means of substituting labor with capital, rather than independent technology innovation; meanwhile, VAT reform distinctly decreases employment. Our findings have essential policy implications on the extension of VAT reform in the entire China.

Keywords: Value-Added Tax, Firm, Fixed Asset, Labor, Employment

JEL Classification: H250, L210, L250, J230

Suggested Citation

Nie, Huihua and Fang, Mingyue and Li, Tao, China’s Value-Added Tax Reform, Firm Behavior, and Performance (November 21, 2010). Frontiers of Economics in China, Vol. 5, No. 3, pp. 445-463, 2010. Available at SSRN: https://ssrn.com/abstract=1712746

Huihua Nie (Contact Author)

Renmin University of China - School of Economics ( email )

59 Zhongguancun St., Haidian
School of Economics, RUC
Beijing, Beijing 100872
China

HOME PAGE: http://www.niehuihua.com

Mingyue Fang

Renmin University of China - School of Economics ( email )

No. 59, Zhongguancun Street
Beijing, Beijing 100080
China

Tao Li

University of London - School of Oriental and African Studies (SOAS) ( email )

Thornhaugh Street
Russell Square: College Buildings 541
London, WC1H 0XG
United Kingdom

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