Corporate Tax Cuts for Small Firms: What Do Firms Do?
67 Pages Posted: 27 Oct 2021 Last revised: 29 Mar 2024
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Corporate Tax Cuts for Small Firms: What Do Firms Do?
Corporate Tax Cuts for Small Firms: What Do Firms Do?
Corporate Tax Cuts for Small Firms: What Do Firms Do?
Date Written: October 27, 2021
Abstract
What do small firms do when given a semi-permanent corporate income tax cut? We examine firm responses to a substantial reduction in the tax rate for small- and micro-profit enterprises (SMPE) in China, using gradual increases in the qualifying threshold during 2010-2016 for identification. Based on confidential tax returns, we find that newly qualified SMPEs with immediate tax savings increased investment and productivity, while there was no change in wages or payout to shareholders. There is some weak evidence the tax cut induced entry of micro-sized firms in financially constrained sectors. Yet its size-based design led to bunching and incentivized firms to slow down growth when they approached the size threshold.
Keywords: tax incentives, small firms, productivity, investment, firm entry
JEL Classification: D24, G30, H20, H25
Suggested Citation: Suggested Citation