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NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Impact of Corporate Taxes on Firm Innovation: Evidence from the Corporate Tax Collection Reform in China

Jing Cai, Yuyu Chen, Xuan Wang

NBER Working Paper No. 25146
Issued in October 2018
NBER Program(s):Development Economics, Public Economics, Productivity, Innovation, and Entrepreneurship

This paper exploits a tax reform on manufacturing firms in China to study the impact of taxes on firm innovation. The reform switched the corporate income tax collection from the local to the state tax bureau and reduced the effective tax rate by 10%. The reform only applied to firms established after January 2002, allowing us to use regression discontinuity design as the identification strategy. The results show that lower taxes improved both quantity and quality of firm innovation. Moreover, the reform has a bigger impact on firms that are financially constrained and firms that engage more in tax evasion.

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Document Object Identifier (DOI): 10.3386/w25146

 
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