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Notching R&D Investment with Corporate Income Tax Cuts in China

Zhao Chen, Zhikuo Liu, Juan Carlos Suárez Serrato and Daniel Yi Xu

American Economic Review, 2021, vol. 111, issue 7, 2065-2100

Abstract: We study a Chinese policy that awards substantial tax cuts to firms with R&D investment over a threshold or "notch." Quasi-experimental variation and administrative tax data show a significant increase in reported R&D that is partly driven by firms relabeling expenses as R&D. Structural estimates show relabeling accounts for 24.2 percent of reported R&D and that doubling R&D would increase productivity by 9 percent. Policy simulations show that firm selection and relabeling determine the cost-effectiveness of stimulating R&D, that notch-based policies are more effective than tax credits when relabeling is prevalent, and that modest spill-overs justify the program from a welfare perspective.

JEL-codes: D22 D24 H25 O14 O32 P31 P35 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (73)

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DOI: 10.1257/aer.20191758

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