Do investment tax incentives promote firm pollution abatement investment? Evidence from China’s value-added tax reform

Abstract

Using the 2009 consumption-based value-added tax (VAT) reform in China as a quasi-natural experiment for investment tax incentives, we investigate the impact of investment tax incentives on firm pollution abatement investment via a difference-in-differences (DID) approach. We find that the investment tax incentives have significantly raised firm pollution abatement investment of the eligible firms over the ineligible firms by 21.7%. Moreover, the effect is more pronounced for firms with political connection and firms located in regions with stricter environment regulation and lower pollution abatement costs. Our mechanism shows that the motivations for tax deduction play an important role in increasing pollution abatement investment. We also find that VAT reform has a negative indirect impact on firm environmental fine and firm employments and has a positive impact on firm’s capital-labor ratio and labor productivity.