How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with Vat
57 Pages Posted: 17 Jan 2022 Last revised: 7 Jul 2024
There are 3 versions of this paper
How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT
How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with Vat
How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT
Date Written: January 2022
Abstract
We investigate the impact of tax cascading on upstream and downstream firms. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for service industries in China, which effectively removed tax cascading. We find a relative increase in sales, R&D investment, and employment for affected service firms. These changes are mainly driven by increased outsourcing from manufacturing firms, and are unlikely to be caused by changes in firms’ tax burden or output prices. Our study provides new evidence on how taxation affects supplier networks and firm performance.
Suggested Citation: Suggested Citation