Who benefits from investment tax incentives? Evidence from China’s VAT reform

Jing Cao a, Guangrong Ma b,*, Jie Mao c, Haoru Yin d

ABSTRACT

China initiated permanent tax incentives for fixed asset investments by firms in 2009. This study empirically investigates the incidence of this investment tax incentive. We use a unique firm-level dataset and a difference-in-differences approach to test how the reform impacts firm employment, wages, product prices, and profits. We find that the reform simultaneously increases employment and average wages. Although product prices do not change after the reform, it leads to a sig-nificant increase in firm total profits. Firm owners and employees pocketed approximately 38% and 62% of the tax cut, respectively, while consumers received almost no direct benefit.

Keywords:Tax incidenceVATTax incentives