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

38 Pages Posted: 4 Feb 2022

See all articles by Katarzyna Anna Bilicka

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

Jing Xing

Antai College of Economics & Management, Shanghai Jiao Tong University

Multiple version iconThere are 3 versions of this paper

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

Suggested Citation

Bilicka, Katarzyna Anna and Hou, Xipei and Xing, Jing, How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT (January 2022). CEPR Discussion Paper No. DP16886, Available at SSRN: https://ssrn.com/abstract=4026772

Katarzyna Anna Bilicka (Contact Author)

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

Jing Xing

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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