Do Corporate Income Tax Cuts Decrease Labor Share? Regression Discontinuity Evidence from China

42 Pages Posted: 19 Nov 2020 Last revised: 2 Jan 2021

See all articles by Bing Li

Bing Li

Central University of Finance and Economics (CUFE)

Chang Liu

Princeton University

Stephen Teng Sun

City University of Hong Kong (CityU) - Department of Accountancy

Date Written: November 12, 2017

Abstract

Recent years have seen a sustained decline in the labor share around the world. This paper studies this trend by focusing on the effect of corporate income taxes on firm-level labor shares. From 2010 to 2013, the Chinese central government cut the corporate income tax rate in 21 cities for service firms whose revenue from outsourcing services offshore surpassed half of their total revenue. Leveraging a regression discontinuity design with proprietary administrative data, we find that a one percentage point decrease in the statutory corporate income tax rate induces a one percentage point decrease in the firm-level labor share. Firms respond to the tax cut by increasing their physical capital and bank borrowing while keeping their employment unchanged, consistent with a capital deepening process documented in recent theoretical models. Our results suggest that falling corporate income taxes could have contributed to the global decline in the labor share.

Keywords: Corporate Income Tax Cut, Offshore Service Outsourcing Firms, Regression Discontinuity Design, Capital Deepening

JEL Classification: H22, H25, H32, J31

Suggested Citation

Li, Bing and Liu, Chang and Sun, Stephen Teng, Do Corporate Income Tax Cuts Decrease Labor Share? Regression Discontinuity Evidence from China (November 12, 2017). Available at SSRN: https://ssrn.com/abstract=3709901 or http://dx.doi.org/10.2139/ssrn.3709901

Bing Li

Central University of Finance and Economics (CUFE)

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Chang Liu (Contact Author)

Princeton University ( email )

Princeton, NJ 08540
United States

Stephen Teng Sun

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
125
Abstract Views
462
rank
291,064
PlumX Metrics