Unintended consequences of tax incentives on firms' human capital composition: Evidence from China

Zhiqi Zhao, Yong Yue and Wangshuai Wang

China Economic Review, 2024, vol. 84, issue C

Abstract: This paper investigates the unintended effects of tax incentives on firms' human capital composition. By exploring data on A-share listed firms from 2015 to 2020 and utilizing a quasi-experimental design, we examine the impact of the 2018 value-added tax (VAT) credit refund policy on the human capital composition of firms' workforce. We find that treated firms increased the ratio of R&D employees by 0.61% relative to control firms. The incentive effect is more pronounced for firms in modern service sectors, mature firms, non-state-owned firms, and firms located in eastern regions. The mechanism reveals that the VAT policy, by refunding tax credits to pilot firms, alleviated internal financing constraints and prompted firms to increase investments in fixed assets and R&D expenditures. This enhanced the firms' human capital structure. Our study provides a novel perspective on how tax incentives unintentionally affect firms' human capital composition while also providing insights into further refining China's VAT credit-refund system in the post-COVID era.

Keywords: VAT credit refund; Human capital composition; Unintended effect (search for similar items in EconPapers)
JEL-codes: D21 D22 H25 H32 J21 J24 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:84:y:2024:i:c:s1043951x24000270

DOI: 10.1016/j.chieco.2024.102138

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