How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT
In this paper, we investigate distortions created by turnover taxes. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for some service industries in China, while the taxation of manufacturing industries remained unchanged. The reform increased sales, R&D investment, and employment for affected service firms, which is primarily driven by outsourcing from downstream manufacturing firms. We document that smaller and less innovative manufacturing firms outsource more, and reallocation increases the quality of innovation for affected service firms. Our study provides new evidence on the negative impact of turnover taxes imposed on business inputs.
We would like to thank Wei Cui, Irem Guceri, Jim Hines, Eric Ohrn, Nadine Riedel, Nathan Seegert, Sebastian Siegloch, Martin Simmler, and the participants at the BUY/Utah Applied Microeconomics Workshop, IEB: Workshop on Economics of Taxation, ZEW Public Finance Conference, European Commission JRC Fiscal Policy Modelling Workshop, IIPF, NTA, and Zurich Public Economics in Developing Countries workshop for their comments. Xing acknowledges financial support from the National Natural Science Foundation of China (No. 71903125) and the Shanghai Pujiang Program (No. 16PJC056). All omissions and errors are 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.