Tax incentive and corporate hiring decisions: Evidence from China's VAT credit refund policy

Abstract

AbstractHuman capital acts as an increasingly crucial factor for firms to sustain stable performance and maintain competitiveness. However, we know little about how tax incentive affects corporate hiring decision concerning highly skilled employees. Using the policy of value‐added tax (VAT) credit refund in China as a quasi‐natural experiment, we explore whether and how VAT credit refund affects firms' hiring decisions on highly skilled employees. The Difference‐in‐Differences (DiD) estimate reveals that the VAT credit refund policy significantly increases the proportion of highly skilled employees. Further, the policy effect becomes more prominent in firms with heavier tax burdens, lower capital intensity, and higher financial constraints. Our mechanism tests reveal that credit refund alleviates liquidity constraints and improves capital‐skill complementarity, thus exerting a positive effect on corporate human capital upgrading. In addition, we find that the VAT credit refund policy improves earnings‐per‐worker and labor productivity but plays an insignificant role in labor income share. Our findings support the proposition that VAT credit refund leads to a positive effect on corporate human capital upgrading, offering new insights for policymakers to improve corporate employment skill structure and support the implementation of tax incentives to upgrade the labor force.