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International Tax and Public Finance

, Volume 25, Issue 4, pp 913–945 | Cite as

The effect of investment tax incentives: evidence from China’s value-added tax reform

  • Lei ZhangEmail author
  • Yuyu Chen
  • Zongyan He
Article

Abstract

We estimate the impact of investment tax credit on firm fixed investment in a difference-in-differences-in-differences framework, using China’s 2004 value-added tax reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the Northeastern region. The tax credit raises significantly fixed investment of eligible firms by 28% on average during 2004–2007 relative to 2001–2003, corresponding to a user cost elasticity of 1.84. The tax incentive has larger effects on firms that are less financially constrained such as smaller firms and firms with a larger cash flow. The result is largely driven by responses of domestic private firms and is robust to specifications addressing the issue of anticipation.

Keywords

Firm fixed investment Investment tax credit Value-added tax reform China 

JEL Classification

G31 H25 H32 

Notes

Acknowledgements

We thank Alan Auerbach, Hong Ma, Jim Poterba, Kevin Tsui, Jing Xing, and seminar participants of 71st IIPF Annual Congress, Public Finance Issues in China conference, Shanghai Jiaotong University, Tongji University, and the UC-Berkeley Public Finance Lunch for helpful comments. Part of this research was completed while Lei Zhang was visiting the Burch Center for Tax Policy and Public Finance at the Economics Department of UC-Berkeley.

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Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  1. 1.Antai College of Economics and ManagementShanghai Jiao Tong UniversityShanghaiChina
  2. 2.Guanghua School of ManagementPeking UniversityBeijingChina
  3. 3.Shanghai Shenyin & Wanguo Securities Research Co. LtdShanghaiChina

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