Cash on the Table? Imperfect Take-up of Tax Incentives and Firm Investment Behavior

71 Pages Posted: 25 Sep 2020 Last revised: 9 Nov 2021

See all articles by Wei Cui

Wei Cui

University of British Columbia (UBC), Faculty of Law

Jeffrey Hicks

University of Toronto

Jing Xing

Antai College of Economics & Management, Shanghai Jiao Tong University

Multiple version iconThere are 2 versions of this paper

Date Written: July 8, 2020

Abstract

We investigate whether tax incentives are effective in stimulating private investment in less developed countries, by exploiting the introduction of accelerated depreciation for fixed assets investment in China as a natural experiment. In contrast to the large positive impact of similar tax incentives in the U.S. and U.K. found in recent studies, accelerated depreciation appeared ineffective in stimulating Chinese firms’ investment. Using confidential corporate tax returns from a large province, we find that firms fail to claim the tax benefits on over 80 percent of eligible investments. Firms’ take-up of the tax incentive is significantly influenced by their taxable positions and tax sophistication. Information transmission and resources of local tax authorities also play a significant role. Our study contributes to the understanding of conditions under which tax-based investment incentives can be effective.

Keywords: tax incentives, investment, take-up, tax administration

JEL Classification: H2,H3

Suggested Citation

Cui, Wei and Hicks, Jeffrey and Xing, Jing, Cash on the Table? Imperfect Take-up of Tax Incentives and Firm Investment Behavior (July 8, 2020). Available at SSRN: https://ssrn.com/abstract=3695120 or http://dx.doi.org/10.2139/ssrn.3695120

Wei Cui

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/

Jing Xing (Contact Author)

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

1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China
86 21 52301040 (Phone)

HOME PAGE: http://www.acem.sjtu.edu.cn/en/faculty/xingjing.html

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