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The effect of investment tax incentives: evidence from China’s value-added tax reform

Lei Zhang (), Yuyu Chen () and Zongyan He ()
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Lei Zhang: Shanghai Jiao Tong University
Zongyan He: Shanghai Shenyin & Wanguo Securities Research Co. Ltd

International Tax and Public Finance, 2018, vol. 25, issue 4, 913-945

Abstract: Abstract We estimate the impact of investment tax credit on firm fixed investment in a difference-in-differences-in-differences framework, using China’s 2004 value-added tax reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the Northeastern region. The tax credit raises significantly fixed investment of eligible firms by 28% on average during 2004–2007 relative to 2001–2003, corresponding to a user cost elasticity of 1.84. The tax incentive has larger effects on firms that are less financially constrained such as smaller firms and firms with a larger cash flow. The result is largely driven by responses of domestic private firms and is robust to specifications addressing the issue of anticipation.

Keywords: Firm fixed investment; Investment tax credit; Value-added tax reform; China (search for similar items in EconPapers)
JEL-codes: G31 H25 H32 (search for similar items in EconPapers)
Date: 2018
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