How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT

37 Pages Posted: 18 Jan 2022

See all articles by Jing Xing

Jing Xing

Antai College of Economics & Management, Shanghai Jiao Tong University

Katarzyna Anna Bilicka

Utah State University; University of Oxford - Oxford University Centre for Business Taxation

Xipei Hou

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

Multiple version iconThere are 3 versions of this paper

Date Written: 2022

Abstract

In this paper, we investigate distortions created by turnover taxes. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for some service industries in China, while the taxation of manufacturing industries remained unchanged. The reform increased sales, R&D investment, and employment for affected service firms, which is primarily driven by outsourcing from downstream manufacturing _rms. We document that smaller and less innovative manufacturing firms outsource more, and reallocation increases the quality of innovation for affected service firms. Our study provides new evidence on the negative impact of turnover taxes imposed on business inputs.

Keywords: turnover tax, value-added tax, outsourcing, R&D investment

JEL Classification: H250, H260, O320, D250

Suggested Citation

Xing, Jing and Bilicka, Katarzyna Anna and Hou, Xipei, How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT (2022). CESifo Working Paper No. 9511, Available at SSRN: https://ssrn.com/abstract=4009411 or http://dx.doi.org/10.2139/ssrn.4009411

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

Katarzyna Anna Bilicka

Utah State University ( email )

Logan, UT 84322
United States

University of Oxford - Oxford University Centre for Business Taxation ( email )

Saïd Business School
Park End Street
Oxford, OX1 1HP
United Kingdom

Xipei Hou

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

No.535 Fahuazhen Road
Shanghai
China

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