Notching R&D Investment with Corporate Income Tax Cuts in China

79 Pages Posted: 25 Jun 2018

See all articles by Zhao Chen

Zhao Chen

Fudan University

Zhikuo Liu

Shanghai University of Finance and Economics

Juan Carlos Suárez Serrato

Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Daniel Yi Xu

Duke University

Date Written: June 2018

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 that firms significantly increase reported R&D, and that relabeling of expenses accounts for 30% of this increase. Accounting for relabeling is crucial to obtain unbiased estimates of the productivity effects of real R&D and to quantify the fiscal costs of stimulating R&D. We estimate a 9.8% productivity-to-R&D elasticity using a structural model of investment and relabeling. Policy simulations show that selection into the program and relabeling costs determine the cost-effectiveness of stimulating R&D.

Suggested Citation

Chen, Zhao and Liu, Zhikuo and Suárez Serrato, Juan Carlos and Yi Xu, Daniel, Notching R&D Investment with Corporate Income Tax Cuts in China (June 2018). NBER Working Paper No. w24749. Available at SSRN: https://ssrn.com/abstract=3202053

Zhao Chen (Contact Author)

Fudan University ( email )

Shanghai, 200433
China

Zhikuo Liu

Shanghai University of Finance and Economics

Juan Carlos Suárez Serrato

Duke University - Department of Economics ( email )

Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Daniel Yi Xu

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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