Does tax deduction relax financing constraints? Evidence from China's value-added tax reform

Jingwen Wang, Guangjun Shen and Dunzhe Tang

China Economic Review, 2021, vol. 67, issue C

Abstract: Financial constraint is a significant obstacle for firm growth, especially in developing countries where credit is scarce. This paper explores the role of tax policy in relaxing firms' financial constraints by exploiting China's value-added tax (VAT) reform that was initiated in 2004 and completed in 2009. We use a quasi-experimental method and Annual Survey of Industrial Firms (ASIF) data from 2000 to 2009 to estimate the VAT reform's policy effects on financial constraints. We show that the VAT reform significantly improves firms' external financing capacity by decreasing borrowing costs and promoting commercial credit. The findings are robust to alternative specifications but show heterogeneity across ownerships, firm sizes, regions, and between export and non-export firms. Our analysis suggests tax deduction is useful to relax firms' financial constraints.

Keywords: Tax deduction; Financial constraints; External financing; VAT reform (search for similar items in EconPapers)
JEL-codes: D21 E62 G32 H25 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:67:y:2021:i:c:s1043951x21000377

DOI: 10.1016/j.chieco.2021.101619

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