Tax Cuts and Fee Reductions and Labor Demand of SMEs

Abstract

<p>Policies to cut taxes and fees are important means to deal with the economic downturn, which strongly support to the development of the majority of small and medium-sized enterprises (SMEs). The current study has no consistent conclusion of whether SMEs expand their labor demand because of this. This paper builds a structural vector autoregressive (VAR) model to analyze the dynamic effects of tax cuts and fee reduction policies on increasing labor demand for SMEs. The empirical results show that tax cuts and fee reductions are important causes of short-term employment fluctuations, but in the long run, it is difficult for taxation policies to have a direct positive effect on employment. Therefore, this article puts forward the idea that different tax incentives can be formulated for small and medium-sized enterprises in the short term according to their life cycles. In the long run, the focus of macro-control needs to be turned to supply management to achieve the goal of stable employment.</p>