The response of small firms to VAT thresholds: evidence from China

ABSTRACT

This paper explores the response of small-scale value-added tax (VAT) taxpayers to the changes of VAT thresholds and VAT tax rates. Using firm-level tax administrative data for the period between 2005 and 2012, we find that firms tend to bunch around the VAT thresholds. We also find that commercial firms and firms with higher value-added ratios are less likely to register as general taxpayers. We provide an estimate of the elasticity of the VAT tax base in the range of 0.027 and 0.05.

KEY WORDS:

• Value-added Tax
• small-scale taxpayers
• bunching

JEL CLASSIFICATION:

• H25
• H26
• H32

Acknowledgments

The authors appreciate the feedback from participants in the 2016 Southern Economic Association annual meeting, Wuhan University workshop, ZUEL and CUFE workshops.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Food grains, natural gas are examples of the products subject to a 13% VAT rate. The tax rate is 0% for taxpayers exporting goods.

² See Y. Liu and Mao (2019) for detail information on the tax return data of China.

³ We drop non-VAT taxpayers, VAT taxpayers of members of consolidated tax paying entity, and VAT taxpayers of the tax consolidating headquarters.

⁴ Taxable income is calculated based on the general sales of goods and services for general taxpayers, while small-scale VAT taxpayers pay their taxes according to their sales of dutiable goods and services calculated using the simplified method.

⁵ More detailed method and results are available upon request.

⁶ These two rates are calculated based on a regular 17% tax rate, which might be different for firms in the agriculture industry.

Additional information

Funding

This research was funded by the National Social Science Foundation of China [19ZDA072, 18CJY064], Central University of Finance and Economics [QYP2001], and supported by the Fundamental Research Funds for the Central Universities.