China’s VAT Tax Reform: A Boon for the Economy or an Opportunity for Moral Hazard?

Ben Sopranzetti () and Yue Ma ()
Additional contact information
Ben Sopranzetti: Northeastern Normal University, Changchun, Nanguan District, China
Yue Ma: Northeastern Normal University, Changchun, Nanguan District, China

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2020, vol. 23, issue 01, 1-15

Abstract: In 2012, the Chinese government replaced the existing business sales tax with a Value-added tax for some, but not all, Shanghainese firms. The change was intended to reduce the effective tax rate for firms and stimulate capital investment and employment. Of concern is the potential for managerial moral hazard, whereby self-interested managers might appropriate some of the tax savings for themselves rather than use the tax savings as intended. This paper examines the impact of the tax change on the affected firms and finds no significant evidence that the intended positive effects were achieved. Moreover, it also finds no strong evidence of moral hazard. Instead, the paper documents that the tax change seems to have had a deleterious effect on firm performance. Specifically, employee compensation, capital expenditures, and free cash flow are all lower when the tax changes became effective, with the negative impact on cash flows lingering through 2014. An examination of the effective tax rate reveals that the tax change increased rather than decreased the effective tax rate in 2012 and 2013.

Keywords: Value-added tax; VAT; moral hazard; China; agency problems (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219091520500046
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:rpbfmp:v:23:y:2020:i:01:n:s0219091520500046

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219091520500046

Access Statistics for this article

Review of Pacific Basin Financial Markets and Policies (RPBFMP) is currently edited by Cheng-few Lee

More articles in Review of Pacific Basin Financial Markets and Policies (RPBFMP) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().