Value-Added Tax and Corporate Tax Burden: Evidence from China’s Value-Added Tax Rate Reform

Abstract

China introduced the value-added tax (VAT) rate reform in 2017 to reduce the burden on firms and stimulate the economy. This study builds a simple theoretical framework and employs the 2017 VAT rate reform as a quasi-natural experiment to evaluate the effects of the VAT rate reform on the corporate tax burden. We find that the VAT rate reform significantly reduces the corporate total tax burden by 9.1% (an effect mainly driven by the decrease in the VAT burden), while the reform has no significant impact on enterprise income tax burden. Furthermore, the effects of VAT reduction on the corporate tax burden are primarily significant in firms with lower intermediate input ratios, firms facing lower market monopolies, firms from eastern China and firms with high-fixed assets.