The Effect of Investment Tax Incentives: Evidence from China’s Value-Added Tax Reform

44 Pages Posted: 29 Aug 2011 Last revised: 11 Aug 2015

See all articles by Yuyu Chen

Yuyu Chen

Peking University - Guanghua School of Management

Zongyan He

Peking University, Guanghua School of Management

Lei Zhang

Antai College of Economics and Management, Shanghai Jiao Tong University

Date Written: June 1, 2015

Abstract

We estimate the impact of investment tax credit on firm fixed investment, using China’s 2004 value-added tax reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the Northeastern region. The tax credit raises significantly fixed investment of eligible firms by 28 percent on average during 2004-2007 relative to 2001-2003, corresponding to a user cost elasticity of 1.84. The result is largely driven by responses of domestic private firms and is robust to specifications addressing the issue of anticipation. Smaller firms and firms with larger cash flow respond more strongly to the tax credit.

Keywords: value-added tax reform, investment tax credit, firm fixed investment, China

JEL Classification: G31, H25, H32

Suggested Citation

Chen, Yuyu and He, Zongyan and Zhang, Lei, The Effect of Investment Tax Incentives: Evidence from China’s Value-Added Tax Reform (June 1, 2015). Available at SSRN: https://ssrn.com/abstract=1918579 or http://dx.doi.org/10.2139/ssrn.1918579

Yuyu Chen

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Zongyan He

Peking University, Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Lei Zhang (Contact Author)

Antai College of Economics and Management, Shanghai Jiao Tong University ( email )

HOME PAGE: http://sites.google.com/site/zlei89/

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