How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT

Jing Xing, Katarzyna Bilicka and Xipei Hou

No 16886, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this paper, we investigate distortions created by turnover taxes. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for some service industries in China, while the taxation of manufacturing industries remained unchanged. The reform increased sales, R&D investment, and employment for affected service firms, which is primarily driven by outsourcing from downstream manufacturing firms. We document that smaller and less innovative manufacturing firms outsource more, and reallocation increases the quality of innovation for affected service firms. Our study provides new evidence on the negative impact of turnover taxes imposed on business inputs.

Keywords: Turnover tax; Value-added tax; Outsourcing; R\&d investment (search for similar items in EconPapers)
JEL-codes: H25 H32 O32 (search for similar items in EconPapers)
Date: 2022-01
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Working Paper: How Distortive Are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT (2022)
Working Paper: How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT (2022)
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