The Government's fiscal and taxation policy effect on enterprise productivity: Policy choice and optimal allocation

Abstract

Based on a thorough exploration of the mechanisms by which fiscal subsidies and tax incentives influence enterprise productivity, this research conducts an empirical analysis, leveraging a detailed micro-database of Chinese industrial enterprises spanning from 1998 to 2012, and applies a fixed-effect methodology to rigorously evaluate the effects of these fiscal and tax policies. The findings of this research indicate that: (1) On average, both fiscal subsidies and tax incentives help to increase the productivity of Chinese enterprises. Regarding the impact of individual policies, it is discerned that the stimulative influence of tax incentives surpasses that of fiscal subsidies in terms of promoting enterprise productivity. This conclusion is still valid after the robustness test. (2) By examining the heterogeneous characteristics of the city's administrative hierarchy, industry factor intensity, and enterprise ownership, it is found that the “productivity effect” of fiscal subsidies in municipalities is the largest, and the “productivity effect” of tax incentives in prefecture-level cities is the largest. The productivity of capital and labor-intensive enterprises benefits most from fiscal subsidies. There is little difference in the impact of tax incentives on the productivity of enterprises across various industries. Considering the aspect of enterprise ownership, it is observed that private enterprises leverage fiscal subsidies and tax incentives more effectively than state-owned enterprises to enhance their productivity. (3) There are synergy effects between fiscal subsidies and tax incentives in promoting enterprise productivity. The government can maximize corporate productivity by allocating tax incentives and fiscal subsidies at a ratio of 3.12:1.