Notching R&D Investment with Corporate Income Tax Cuts in China
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.
We are very grateful for comments from Manuel Adelino, Ashish Arora, Pierre Bachas, Michael Best, Lysle Boller, Wesley Cohen, Dhammika Dharmapala, Michael Devereux, Rebecca Diamond, Liran Einav, Bronwyn Hall, Jim Hines, Damon Jones, Henrik Kleven, Ben Lockwood, Jill Popadak, Jim Poterba, Nirupama Rao, Mark Roberts, Joel Slemrod, Stefanie Stantcheva, John Van Reenen, Mazhar Waseem, Shang-Jin Wei, Daniel Wilson, and Eric Zwick as well as seminar participants at ASSA, CEPR, Chicago (Booth & Becker Friedman), Cornell, Drexel, Duke (Fuqua & Econ), FRB Minneapolis, FRB Philadelphia, FRB San Francisco, Hitsotsubashi University, Hong Kong University, IIPF, LSE, MIT, National School of Development (PKU), NBER (Dev, Ent, China, CCER), NTA, Oxford, Penn State, Stanford (SIEPR & Econ), Toronto, UCLA, UCSD (Econ & Bunching Conference), University of Alberta, University of Maryland, University of Melbourne, Warwick University, and ZEW MaTax. Dan Garrett, Yuxuan He, and Matt Panhans provided outstanding research assistance. This project is funded by NSF grant #17300024, and Suárez Serrato is also grateful for funding from the Kauﬀman Foundation. All errors remain our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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. citation courtesy of