Notching R&D Investment with Corporate Income Tax Cuts in China | Zendy

Chen Zhao | Zendy; Zhikuo Liu | Zendy; Juan Carlos Suárez Serrato | Zendy; Daniel Yi Xu | Zendy

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Notching R&D Investment with Corporate Income Tax Cuts in China

Author(s) -

Chen Zhao,

Zhikuo Liu,

Juan Carlos Suárez Serrato,

Daniel Yi Xu

Publication year - 2018

Publication title -

erpn: research (sub-topic)

Language(s) - English

Resource type - Reports

DOI - 10.3386/w24749

Subject(s) - notching , china , investment (military) , income tax , business , dividend tax , monetary economics , economics , labour economics , market economy , gross income , state income tax , tax reform , materials science , geography , metallurgy , political science , politics , law , archaeology

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 that firms significantly increase reported R&D, and that relabeling of expenses accounts for 30% of this increase. Accounting for relabeling is crucial to obtain unbiased estimates of the productivity effects of real R&D and to quantify the fiscal costs of stimulating R&D. We estimate a 9.8% productivity-to-R&D elasticity using a structural model of investment and relabeling. Policy simulations show that selection into the program and relabeling costs determine the cost-effectiveness of stimulating R&D.

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