Business tax reform and human capital in service industry firms: Evidence from China

Zhinan Liu, Chao Han and Wendi Hou

International Review of Financial Analysis, 2025, vol. 107, issue C

Abstract: This study investigates the impacts of tax incentives on firms' human capital upgrading in the service industry. Using China's Business Tax reform as a natural experiment, based on the capital-skill complementarity hypothesis, we analyze how the reform reduces corporate tax burdens, stimulates capital investment, and boosts the demand for skilled labor. Utilizing panel data from China's A-share listed service firms and employing a Difference-in-Differences (DID) methodology, we find that the reform significantly increases the relative demand for skilled workers in pilot firms, thereby promoting human capital upgrading. Mechanism analyses reveal that the reform enhances human capital through capital-skill complementarity, particularly in firms that are more digitalized, more labor-intensive, subject to tighter financing constraints, and located in regions with a larger registered population. Our findings underscore the critical role of tax policies in shaping firm-level human capital dynamics, offering novel insights into fiscal incentives and labor market evolution.

Keywords: Business tax reform; Service industry firms; Human capital upgrading; Capital-skill complementarity (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:107:y:2025:i:c:s1057521925007215

DOI: 10.1016/j.irfa.2025.104634

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