Enterprise income tax and corporate innovation: evidence from China

ABSTRACT

Using China’s 2008 enterprise income tax (EIT) reform, this study examines the effect of EIT on corporate innovation comprehensively. Based on accurate identification of the direction of changes in the corporate tax rate, we introduce two dummy variables of tax rate decline and escalation to investigate the impact of EIT changes simultaneously. Using the firm-level dataset from China’s A-share listed companies, we find that the innovation level of tax-rate-declining enterprises will increase by 0.2%, whereas the innovation level of tax-rate-increasing enterprises will decrease by 0.4%. The dynamic effect demonstrates that the aforementioned promoting and inhibitory effects are continuous. Heterogeneity analyses reveal that the changes in the EIT rates have a greater impact on the innovation level of enterprises with high innovation demand, manufacturing enterprises, enterprises in a high rule of law environment, and enterprises in the eastern region. Our study highlights the importance of the EIT reform on corporate innovation and guides how to better optimize the effectiveness of such policies.

KEYWORDS:

• Enterprise income tax reform
• innovation effect
• simultaneous estimation
• heterogeneity

JEL CLASSIFICATION:

• D21
• H32
• O31

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ $\left(\left(15.530-9.868\right)÷9.868\right)÷\left(\left(0.176-0.242\right)÷0.242\right)\approx -2.10$.

² Fan and Liu (2020) study the policy effect of the Chinese accelerated depreciation policy on eligible capital, especially the purchase of equipment and machines, and concludes the elasticity of investment is somewhere between 1.64 and 2.06.

³ Since the data are disclosed only until 2009, we use the linear interpolation method to predict the data for 2010–2011.

Additional information

Funding

The work was supported by the Major Project of Zhejiang Provincial Philosophy and Social Science Planning [23NDJCO4ZD]; Fundamental Research Funds for the Central Universities of China .