How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT
38 Pages Posted: 4 Feb 2022
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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
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 firms. 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: Outsourcing, R\&D investment, turnover tax, Value-added tax
JEL Classification: H25, H32, O32
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