Notching R&D Investment with Corporate Income Tax Cuts in China
NBER Working Paper No. 24749
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 that firms significantly increase reported R&D, and that relabeling of expenses accounts for 30% of this increase. Accounting for relabeling is crucial to obtain unbiased estimates of the productivity effects of real R&D and to quantify the fiscal costs of stimulating R&D. We estimate a 9.8% productivity-to-R&D elasticity using a structural model of investment and relabeling. Policy simulations show that selection into the program and relabeling costs determine the cost-effectiveness of stimulating R&D.
Document Object Identifier (DOI): 10.3386/w24749