Adjustments in VAT rates and business innovation: Empirical insights from China

Xiufen Liu, Weizhen Yu and Zixuan Chen

International Review of Economics & Finance, 2024, vol. 93, issue PB, 659-672

Abstract: China aims to alleviate corporate financial pressures and encourage high-quality economic development through initiatives such as value-added tax (VAT) rate reform. This study employs the difference-in-difference (DID) approach to investigate the effect of the 2017 VAT rate reform on corporate innovation, taking the reform as a quasi-natural experiment. We find that the VAT rate reform has significantly promoted firm innovation and that increasing profitability serves as the primary channel. The innovation-promoting effects of the VAT rate reform are most prominently seen in a number of different types of businesses: those with lower intermediate input ratios, those operating in less monopolistic industry environments, state-owned enterprises, non-exporting businesses, entities with limited financial resources, and companies located in non-eastern China. This study makes a case for tax reforms in other nations as well as a reference for China's market-oriented reform and further VAT reform.

Keywords: VAT rates; R&D; Tax burden; Corporate innovation (search for similar items in EconPapers)
JEL-codes: D21 H20 H32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:93:y:2024:i:pb:p:659-672

DOI: 10.1016/j.iref.2024.05.012

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