Taxation and Enterprise Innovation: Evidence from China’s Value-Added Tax Reform

Abstract

This article used China as an example to study how tax reform affects the innovative behavior of companies. Our research showed that value-added tax (VAT) reform can affect corporate innovation behavior. On the basis of patent-application data of Chinese enterprises, we used the difference-in-differences framework to study the differences in the performance of Chinese industrial enterprises in patent applications before and after China’s 2009 VAT reform. We demonstrated that China’s VAT reform had a positive impact on corporate innovation; this conclusion is robust. In subsequent research, we demonstrated that the VAT reform promoted corporate innovation by expanding corporate investment in fixed assets and reducing corporate debt ratios; however, due to the Chinese government’s subsidies to corporations and financing constraints, the pecking-order effect of corporate innovation was increased. In addition, the VAT reform had a greater impact on the innovation of export enterprises and non-state-owned enterprises. This research provided insights for emerging countries into formulating innovation-driven sustainable development tax reduction policies.