NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Value-Added Tax Reform Puzzle

Jing Cai, Ann Harrison

NBER Working Paper No. 17532
Issued in October 2011
NBER Program(s):   ITI

We explore the impact of a tax reform in some provinces of China which eliminated the value-added tax on some investment goods. While the goal of the experiment was to encourage upgrading of technology, our results suggest that there was no evident increase overall in fixed investment, and employment fell significantly in the treated provinces and sectors. The reform reduced the total number of employees for all types of firms. For domestic firms, it reduced employment by almost 8%. Our results are robust to a variety of approaches, and suggest that the primary impact of the policy has been to induce labor-saving growth. This experiment has since been extended to the rest of China.

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This paper was revised on November 7, 2014

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Document Object Identifier (DOI): 10.3386/w17532

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