The Impact of Corporate Taxes on Firm Innovation: Evidence from the Corporate Tax Collection Reform in China

44 Pages Posted: 16 Oct 2018

See all articles by Jing Cai

Jing Cai

University of Maryland

Yuyu Chen

Peking University - Guanghua School of Management

Xuan Wang

University of Michigan at Ann Arbor

Date Written: October 2018

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.

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Suggested Citation

Cai, Jing and Chen, Yuyu and Wang, Xuan, The Impact of Corporate Taxes on Firm Innovation: Evidence from the Corporate Tax Collection Reform in China (October 2018). NBER Working Paper No. w25146. Available at SSRN: https://ssrn.com/abstract=3266239

Jing Cai (Contact Author)

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Yuyu Chen

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Xuan Wang

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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