Abstract
Since 2008, China has provided ITC (investment tax credit) and TID (taxable income deduction) for firms who engage in investment or business related to reducing pollution emissions and saving energy. This paper examines both incidence and effects of these tax incentives. We use a unique panel dataset mainly from the NTSD (the National Tax Statistics Dataset of China) over 2007–2011, and utilize the Probit Model and the specification suggested by Greenstone (2002) to identify incidence and effects of the ITC and TID, respectively. We find that: (1) The two tax incentives are generally not popular. SOEs are the main beneficiaries, while regional characteristics have no impact on taxpayers’ attitude to ITC or TID. The mechanism behind may be that the incentives hurt interests of firms and local governments. (2) Their effects on taxpayers’ activities including capital, employment, and production are not remarkable, while growth of coal consumption significantly speeds up. These findings are robust to multiple specifications of using different empirical strategies, samples, and variables. (3) However, the results indicate that the tax incentives do serve the purpose of protecting environment by restraining coal consumption in some specific group of firms who are affiliated to the central government. This finding confirms a simple model established in the paper that emphasizes the importance of the government’ executive power on tax policies and relates to the literature finding that local support can remarkably boost the efficiency of tax incentives for environmental protection. According to the above findings, we conclude that the tax incentives such as ITC or TID can be effective tools to protect China's environment if correctively designed and adequately implemented.
Highlights
Tax policy is usually more efficient or less distorted than direct regulation, for the former retains individuals’ rights to choose utility-maximizing or cost-minimizing solutions (Tresch 2015, page 129)
(3) the results indicate that the tax incentives do serve the purpose of protecting environment by restraining coal consumption in some specific group of firms who are affiliated to the central government
According to the above findings, we conclude that the tax incentives such as investment tax credit (ITC) or taxable income deduction (TID) can be effective tools to protect China's environment if correctively designed and adequately implemented
Summary
Tax policy is usually more efficient or less distorted than direct regulation, for the former retains individuals’ rights to choose utility-maximizing or cost-minimizing solutions (Tresch 2015, page 129). Since 2008, China has provided ITC (investment tax credit) and TID (taxable income deduction) for firms who engage in investment or business related to reducing pollution emissions and saving energy. This paper examines both incidence and effects of these tax incentives. To avoid fiscal crisis and regain its authority in regulating economic and social development, the central government started an important tax reform in 1994, the tax-sharing reform (fen shui zhi in Chinese). Thousands of national tax bureaus were established to take charge of main taxes such as value-added tax and corporate income tax It became the sole tax legislative authority, laying down the laws or provisional regulations for all types of taxes
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