How Well-Targeted Are Payroll Tax Cuts as a Response to COVID-19? Evidence from China

52 Pages Posted: 9 Sep 2020 Last revised: 12 May 2022

See all articles by Wei Cui

Wei Cui

University of British Columbia (UBC), Faculty of Law

Jeffrey Hicks

University of Toronto

Max B. Norton

University of British Columbia (UBC)

Date Written: May 11, 2022

Abstract

Numerous countries cut payroll taxes in response to COVID-19, including China, which reduced employer contributions by up to 21 percentage points. We use administrative data on more than 800,000 Chinese firms to evaluate payroll tax cuts as a business relief measure. We estimate that the tax cuts cover 31.5% of the decline in business cash flow, but labor informality causes 53% of registered firms---24% of aggregate economic activity---to receive no benefits at all. We quantify the targeting of the policy in terms of how much benefits flow to small firms less able to access external finance and to sectors worse hit by COVID-19. We find that (1) small firms and vulnerable industries are comparatively more labor intensive, which leads to desirable targeting; (2) labor informality worsens, but does not eliminate, targeting by firm size; and (3) labor informality is uncorrelated with the COVID-19 shock, and therefore does not affect targeting by sector.

Keywords: payroll taxes, social insurance, labor informality, COVID, China

JEL Classification: H25, H26, H55

Suggested Citation

Cui, Wei and Hicks, Jeffrey and Norton, Max B., How Well-Targeted Are Payroll Tax Cuts as a Response to COVID-19? Evidence from China (May 11, 2022). Available at SSRN: https://ssrn.com/abstract=3686345 or http://dx.doi.org/10.2139/ssrn.3686345

Wei Cui (Contact Author)

University of British Columbia (UBC), Faculty of Law ( email )

1822 East Mall
Vancouver, BC V6T1Z1
Canada

HOME PAGE: http://https://allard.ubc.ca/about-us/our-people/wei-cui

Jeffrey Hicks

University of Toronto ( email )

Toronto, Ontario M5S 3G7
Canada

HOME PAGE: http://https://jeffrey-hicks.com/

Max B. Norton

University of British Columbia (UBC) ( email )

2329 West Mall
Vancouver, British Columbia BC V6T 1Z4
Canada

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