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

68 Pages Posted: 3 Aug 2024 Last revised: 2 Dec 2024

See all articles by Wei Cui

Wei Cui

University of British Columbia (UBC), Faculty of Law

Mengying Wei

University of International Business and Economics

Jing Xing

Antai College of Economics & Management, Shanghai Jiao Tong University

Weisi Xie

Shanghai Jiao Tong University (SJTU)

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Date Written: November 01, 2021

Abstract

What do small firms do when given a semi-permanent corporate income tax cut? We examine firm responses to a substantial reduction in the tax rate for small- and micro-profit enterprises (SMPE) in China, using gradual increases in the qualifying threshold during 2010-2016 for identification. Based on confidential tax returns, we find that newly qualified SMPEs with immediate tax savings increased investment and productivity, while there was no change in wages or payout to shareholders. There is some weak evidence the tax cut induced entry of micro-sized firms in financially constrained sectors. Yet its size-based design led to bunching and incentivized firms to slow down growth when they approached the size threshold.

Keywords: corporate tax, small businesses, investment, productivity, firm entry

Suggested Citation

Cui, Wei and Wei, Mengying and Xing, Jing and Xie, Weisi, Corporate Tax Cuts for Small Firms: What Do Firms Do? (November 01, 2021). Available at SSRN: https://ssrn.com/abstract=4914525

Wei Cui

University of British Columbia (UBC), Faculty of Law ( email )

1822 East Mall
Vancouver, BC V6T1Z1
Canada

HOME PAGE: http://allard.ubc.ca/about-us/our-people/wei-cui

Mengying Wei

University of International Business and Economics ( email )

10 Huixindongjie, Chaoyang District
Beijing, 100029
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

Weisi Xie

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

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