Corporate Tax Cuts for Small Firms: What Do Firms Do?

62 Pages Posted: 27 Oct 2021 Last revised: 24 Jun 2022

See all articles by Wei Cui

Wei Cui

University of British Columbia (UBC), Faculty of Law

Mengying Wei

University of International Business and Economics (UIBE) - School of Banking and Finance

Weisi Xie

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Jing Xing

Antai College of Economics & Management, Shanghai Jiao Tong University

Multiple version iconThere are 2 versions of this paper

Date Written: October 27, 2021

Abstract

What do small firms do when given an income tax cut? We address this question by examining the consequences of a sharp reduction in the corporate income tax rate for small- and micro-profit enterprises (SMPE) in China based on confidential tax returns. Utilizing the gradual increases in the qualifying threshold for SMPEs during 2010-2016, we find that newly qualified SMPEs with positive taxable income increased investment, interest expense and productivity. SMPEs in taxable losses did not respond to the tax cut. The tax cut induced more SMPEs to register, especially those in financially constrained sectors. Despite these positive effects, firms’ fixed asset growth slows down when they get closer to the SMPE threshold. Our study contributes to understanding the effect of tax preferences for small businesses.

Keywords: tax incentives, small firms, productivity, investment, firm entry

JEL Classification: D24, G30, H20, H25

Suggested Citation

Cui, Wei and Wei, Mengying and Xie, Weisi and Xing, Jing, Corporate Tax Cuts for Small Firms: What Do Firms Do? (October 27, 2021). Available at SSRN: https://ssrn.com/abstract=3950973 or http://dx.doi.org/10.2139/ssrn.3950973

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

Mengying Wei

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Weisi Xie

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No. 1954 Huashan Rd.
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China

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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