Skill biased tax policy change: Labor market effects of China’s VAT reform

Hongbin Li and Lingsheng Meng

Labour Economics, 2022, vol. 78, issue C

Abstract: This paper empirically investigates the labor market effects of China’s 2007 VAT reform, which significantly reduced the tax cost of capital investment. Employing city-by-year variation in the reform, we demonstrate that the tax cuts increased the earnings of skilled workers and left the earnings of the unskilled workers unaffected. Moreover, we find limited impacts of the reform on employment for both skill groups. These results suggest that the tax incentives increased the relative demand for skills, thus resulting in a higher income inequality between skilled and unskilled workers.

Keywords: VAT; Labor market; Inequality; China (search for similar items in EconPapers)
JEL-codes: H25 J31 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:labeco:v:78:y:2022:i:c:s092753712200104x

DOI: 10.1016/j.labeco.2022.102213

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