Notching R&D Investment with Corporate Income Tax Cuts in China

Zhao Chen, Zhikuo Liu, Juan Carlos Suárez Serrato and Yi Xu ()

No 24749, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study a Chinese policy that awards substantial tax cuts to firms with R&D investment over a threshold or “notch.” Quasi-experimental variation and administrative tax data show a significant increase in reported R&D that is partly driven by firms relabeling expenses as R&D. Structural estimates show relabeling accounts for 24.2% of reported R&D and that productivity increases by 9% when real R&D doubles. Policy simulations show firm selection and relabeling determine the cost-effectiveness of stimulating R&D, that notch-based policies are more effective than tax credits when relabeling is prevalent, and that modest spillovers justify the program from a welfare perspective.

JEL-codes: H2 O3 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-cna, nep-pbe, nep-pub and nep-tra
Note: DEV IO PE PR
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Published as Zhao Chen & Zhikuo Liu & Juan Carlos Suárez Serrato & Daniel Yi Xu, 2021. "Notching R&D Investment with Corporate Income Tax Cuts in China," American Economic Review, vol 111(7), pages 2065-2100.

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