Notching R&D Investment with Corporate Income Tax Cuts in China
Zhao Chen, Zhikuo Liu, Juan Carlos Suárez Serrato, Daniel Yi Xu
American Economic Review · 2021 · Volume 111 · Issue 7
Abstract
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 percent of reported R&D and that doubling R&D would increase productivity by 9 percent. Policy simulations show that 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 spill-overs justify the program from a welfare perspective.
Keywords
Firm Behavior: Empirical Analysis, Production, Cost, Capital, Total Factor, and Multifactor Productivity, Capacity, Business Taxes and Subsidies including sales and value-added (VAT), Industrialization, Manufacturing and Service Industries, Choice of Technology, Management of Technological Innovation and R&D, Socialist Enterprises and Their Transitions, Socialist Institutions and Their Transitions: Public Economics
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