Tax Reform In China Research Articles

Environmental Protection Tax Reform in China: A Catalyst or a Barrier to Total Factor Productivity? An Analysis through a Quasi-Natural Experiment

China’s 2018 environmental protection tax (EPT) reform was introduced in response to increasing concerns about environmental degradation. It aimed to use fiscal policy to enhance environmental governance while fostering economic productivity. This study employs a difference-in-differences approach to analyze panel data from publicly listed companies between 2009 and 2019. It examines the reform’s influence on total factor productivity (TFP) in pollution-intensive industries, addressing both environmental and economic objectives. The results reveal that the tax reform significantly enhances TFP, acting as a robust catalyst for economic growth rather than a barrier. This effect is particularly strong in state-owned enterprises and those with less-severe financing constraints. Mechanism analysis indicates that the reform boosts TFP through the promotion of green innovations and alleviation of financing constraints. These findings provide empirical evidence at the micro-level of the reform’s efficacy in promoting sustainable business practices. The study offers insights for future environmental tax policies in China and underscores the necessity of aligning environmental and economic strategies to achieve sustainable development.

China's environmental tax reform achieves the co-management of carbon and haze: The role of optimizing energy utilization

Environmental tax reform in China is an essential initiative to achieve carbon and haze co-management by shifting the Environmental Fee to Tax (EFT). Therefore, we employ a Coupling Coordination Degree (CCD) model to measure the level of carbon and haze co-management across three distinct scenarios in China. Treating the EFT policy as a quasi-natural experiment, the study explores its impact on carbon and haze co-management using data of 282 prefecture-level cities in China during 2015–2020. Furthermore, the study further analyzes the regional heterogeneity and the transmission mechanisms of optimizing energy utilization. The principal findings of this investigation are as follows. First, the co-management levels of carbon and haze in China show a discernible upward trend from 2015 to 2020. A heightened emphasis on carbon reduction is helpful in improving the co-management level of carbon and haze. Co-management levels of carbon and haze are lower within the treatment group compared to the control group, but their growth rates are higher. Second, the EFT policy in China has significantly enhanced the co-management level of carbon and haze. Third, the impact of China's EFT policy has a more pronounced effect in western China and a comparatively weaker effect in middle China, which may be attributed to variations in industrial infrastructure, supporting facilities, availability of clean energy resources, and prevailing policy inclinations across different regions of China. Finally, China's EFT policy is an instrumental factor in augmenting the co-management level of carbon and haze, primarily through pathways of upgrading energy structure and improving energy efficiency.

Individual investors’ dividend taxes and managerial myopia

We use a unique setting of the Dividend Tax Reform in China to investigate the impact of differential dividends taxation on managerial myopia. We find that firms prefer to mitigate managerial myopia when the dividends taxes imposed on their individual investors decrease. Moreover, additional analysis presents that the negative effect is more salient for firms with higher investor preference, larger proportions of individual investors, and greater myopic pressures. The results indicate that differential dividends taxation induced lock-in adversely affects managerial myopia.

Property Tax, Levy Expectations and Housing Asset Allocation: Evidence from Chinese Households

Property tax reform in China has long been discussed regarding the reform agenda. However, nationwide implementation remains stalled, with no clarity regarding when and how property taxes will be levied. Uncertain expectations affect household housing assets, the most important assets of Chinese residents. To explore the impact of property tax levy expectations on the allocation of such assets, we construct a theoretical model and use four waves of China Household Finance Survey and Baidu index data for estimation. Property tax levy expectations significantly reduce the proportion of household housing assets to total assets, especially for high-income groups, nonrural hukou households, young-headed households, and households in first-tier cities. For multi-home households, the absolute housing asset quantity drops even more. Moreover, house purchase intentions mediate the impact of property tax levy expectations on household housing asset allocation. The findings provide new insights into upcoming property tax reform and highlight the need to develop differentiated property tax brackets and rates.

Asymmetric corporate tax compliance: Evidence from a tax reform in China

Using China's 2008 corporate tax reform as a quasi-natural experiment, we construct a difference-in-differences setting to study firms' asymmetric tax compliance. Compared to firms whose taxes were unaffected by the reform, firms whose tax rate increased reported significantly lower profit margins to avoid paying more taxes. However, firms facing a tax cut did not behave differently from the unaffected firms. The asymmetric behavior is valid for private firms, but not for state-owned firms that have softer budget constraints. Such tax avoidance is done through the manipulation of the costs of goods sold and other expenses, rather than managing net receivables.

Influence of dividend tax policy tied to investment horizon on stock price stability: Evidence from the 2015 dividend tax reform in China

AbstractWe examine how the dividend tax cut policy tied to the investment horizon enforced on September 8, 2015, influences stock price stability in China's A‐share market. As the new dividend tax policy waives the tax on cash dividends for investors holding a stock for more than a year, it encourages long‐term investment behavior. From 2013 to 2017, we find that stock turnover, return volatility, and turnover volatility decrease after the policy enforcement, especially for stocks with high dividend yields. This result shows that dividend tax reforms increase investors' stock investment horizons and help stabilize the market. However, our findings demonstrate that stock crash risk increases after policy enforcement. Further analysis shows that earnings management through real activities manipulation for stocks with a higher dividend yield contributes to an increase in stock crash risk. Therefore, one externality of the dividend tax cut policy tied to the investment horizon is that top managers of firms with a higher dividend yield may take advantage of investors' passive longer‐term investment behavior and engage in more earnings management. This result suggests that regulatory agencies should pay attention to top managers' earnings management behavior after enacting policies that encourage long‐term investment.

Additional social welfare of environmental regulation: The effect of environmental taxes on income inequality

This study utilizes the environmental tax reform in China as a quasi-natural experiment to investigate the effect of environmental taxes on income inequality. In January 2018, the Environmental Protection Tax Law (EPTL) came into effect in China, provinces began to collect environmental taxes in accordance with the law. We find that the reform contributes to lower within-firm wage inequality. The reform leads to declines in executive compensation and increases in worker wages. We further find that tax enforcement, environmental regulations, fiscal stress and tax competition vary the relationship between the reform and wage inequality. Heterogeneity analyses show that the effect is greater in non-state-owned firms, small firms, and firms with higher board shareholdings. Extensive robustness tests corroborate our inferences. This paper verifies the effectiveness of environmental regulation in enhancing social welfare, and is beneficial for assessing the welfare effects of environmental regulation more accurately. The findings can also help the government reduce obstacles in the implementation of environmental taxes, and further enhance the effectiveness of the EPTL.

The Impact of Diversified Income and Agricultural Tax Reform on the Consumption of Chinese Rural Residents

Income from different sources has become an important guarantee to sustain family life and normal expenses in China. How different sources of income affect farmers’ expenditure levels and how they have influenced farmers’ consumption since the agricultural tax reform in China since the 20th century has become a question worth exploring. Panel data from 2016 to 2020 are utilized to examine rural residents’ consumption expenditures and their sources of disposable income by region to analyze the impact of different income sources on farmers’ consumption and the correlation between income before and after agricultural tax reform, and finally conducts an analysis of future scenarios based on a time series model. The research results show that the elasticity of income from different sources on rural households’ per capita consumption expenditure is different, among which wage income is the most elastic, while household business income has a relatively small effect on consumption expenditure, but through data analysis we can find that agricultural tax reform has a significant and continuous promotion effect on rural households’ per capita consumption expenditure. The continuous cycle of agricultural tax reform is long, and the transmission chain through less tax payment, expanded reproduction, harvest, realization, and then consumption is long, thus there is a certain lag in tax reduction effect. Income from such sources in the first three years has a large impact on the current period data, while the first four and five years have a relatively small impact on current business income.

Do gains in political representation sweeten tax reform in China? It depends on who you ask

AbstractGovernments can grant political concessions to induce quasi-voluntary compliance with taxation, yet empirical evidence probing the taxation–representation connection remains inconclusive. We contend that this association remains valid but it is primarily confined to business elites in nondemocratic regimes because the same wealth that exposes them to state predation also incentivizes them to endorse tax policies that offer greater political representation. We test our argument by evaluating preferences for hypothetical tax reforms in separate samples of business elites and ordinary citizens in China. We find that business elites show stronger preference than nonelites for tax policies that include advances in political representation. We explore various mechanisms for our results and find support for government credibility, tax ownership, and tax salience considerations.

Tax structure and corporate tax compliance: evidence from China

This article empirically examines the impact of tax structure on corporate tax compliance using Chinese industrial enterprise database and prefectural data. The results show that relying more on indirect taxes tends to decrease corporate tax compliance, while increasing the ratio of direct taxes of total tax revenues significantly enhances corporate tax compliance. To overcome endogeneity, the robustness is tested using instrumental variables and other robustness checks, such as changing variables and changing time windows. Mechanism analysis shows that it is conducive to reducing the complexity of the tax system, improving the quality of governance, and enhancing taxation efforts. This article examines the impact of tax system on corporate taxation behaviour from the perspective of the tax structure, which also provides microscopic empirical evidence for tax reform in China.

Business Tax reform and CSR engagement: Evidence from China

This study investigates the impacts of tax incentives on firms' CSR engagement. Using the staggered Business Tax reform in China as exogenous shocks, our difference-in-differences estimation shows that tax incentives facilitate firms' CSR disclosure, and a plausible mechanism is the released financial burden. The result remains valid under a battery of robustness checks and is more pronounced for state-owned firms, firms with tighter political connections, firms with transparent information and firms locate in areas with higher degree of social trust. The study provides clear policy implications by elaborating on the favorable impacts of tax incentives on firms' CSR performance.

Asymmetric Corporate Tax Compliance: Evidence from a Tax Reform in China

Asymmetric Corporate Tax Compliance: Evidence from a Tax Reform in China

Dividend payouts and catering to demands: Evidence from a dividend tax reform

Utilizing the 2012 dividend tax reform in China, this paper examines how firms make dividend payout decisions that cater to the controlling shareholders' demand, especially when controlling shareholders and outside minority shareholders have different dividend preferences. We find that firms increase dividend payouts when controlling shareholders demand higher dividends after the dividend tax reform. In particular, firms pay higher dividends when facing increased demand from controlling shareholders than when the demand is from minority investors. In addition, we find that firms that increase dividend payments due to the controlling shareholders' demand subsequently have more debt financing and poorer firm performance, suggesting that catering to the demands from controlling shareholders is subject to the Type II agency problem.

Research on the Strategy to Actively Promote Real Estate Tax Reform in China

Since the abolition of the welfare housing distribution policy and the implementation of the monetary reform of the housing system in 1998, there has even been a bubble phenomenon despite the rapid development of the Chinese real estate market. However, considering that the reform of real estate tax will affect the whole system, and there are still various disputes about real estate tax in society, the Chinese government is very slow in real estate tax reform. Given this, under the background that the State Council has been authorized by the Standing Committee of the National People’s Congress to pilot real estate tax reform, it is still necessary to explore the legitimacy of China’s real estate tax reform promotion. In general, under the background of solidly promoting common prosperity, resolutely implementing the policy of “housing to live without speculation,” and promoting the stable and healthy development of the real estate market, coupled with the fact that the real estate market has already seen a severe bubble phenomenon. China’s active promotion of real estate tax reform has a solid theoretical and practical basis and has urgency and feasibility.

Personal Income Tax Reform, Income Inequality and Social Welfare

In 2018, China’s personal income tax system ushered in the seventh reform after its introduction in 1980. In this reform, tax exemption and tax rate table are still the main adjustment objects. However, there are still a lot of debates on the actual distribution effect of such reform measures.The specific research objects of this paper can be divided into the following two issues: (1) Can the common measures of personal income tax reform in China since 2005 bring a positive income distribution effect? (2) While adjusting income distribution, can the reform of personal income tax bring a positive welfare effect in the process of economic fluctuation? The research on the above two issues is not only conducive to improving the fairness of distribution, but also helpful to explore the new orientation of future personal income tax reform and realize the reasonable coordination between fairness and efficiency, which makes the research content more suitable for the reform and development needs of stable employment and stable growth under the new normal state of China’s economy.In the process of research, this paper first constructs a new Keynesian dynamic stochastic general equilibrium (NK-DSGE) model with heterogeneous households and progressive personal income tax, and realizes the parameterization of the model with the usage of Bayesian estimation method. Then, using the NK-DSGE model, the dynamic simulation (impulse response analysis) of the effect of the personal income tax reform plan in 2018 (and the possible extensive plan in the future) is carried out. Finally, the welfare loss function is derived from the NK-DSGE model equations, and the efficiency decline and welfare loss caused by various personal income tax reform measures are calculated. Compared with the existing literature, the NK-DSGE analysis in this paper is not only limited to depicting the progressivity of tax rate (the progressive range of tax rate in the tax rate table), but also can simulate the effect of diversified personal income tax reform measures including tax exemption, and analyze the superposition and interaction of different reform measures based on flexible model construction and simulation analysis scheme design.The results show that: (1) The increase of tax exemption expands the fluctuation of pre-tax income inequality and worsens the initial distribution under exogenous shocks such as loose monetary policy. Moreover, the increase of tax exemption weakens the adjustment ability of progressive tax rate to the primary distribution of income. (2) In the process of employment expansion, the change of tax burden brought about by the increase of tax exemption improves the after-tax income distribution. Moreover, after the increase of tax exemption, the increase of the progressivity of tax rate can further improve the income redistribution. Of course, the primary distribution effect and redistribution effect of personal income tax reform have the characteristics of state dependence, which will bring an opposite distribution effect when employment and labor income decrease. (3) Increasing the amount of tax exemption will lead to greater welfare loss, and at the same time, it will weaken the inhibitory effect of progressive tax rate on welfare loss.The main policy enlightenment from the above research results is that future personal income tax reform should carefully adjust tax exemption and focus on the increase of the progressivity of tax rate, so as to better guarantee the high-quality development of China’s economy. In addition, we can also consider adding the dynamic rules of tax exemption which peg the aggregate fluctuation of employment and income to deal with the state dependence of the distribution effect of exemption adjustment policy, so as to make the adjustment of tax exemption produce continuous and positive distribution effects.

Unintended consequences of tax incentives on export product quality: Evidence from a natural experiment in China

AbstractThis study investigates the effects of tax incentives on export product quality. Using a staggered value‐added tax reform in China as exogenous shocks, our difference‐in‐differences estimation shows that tax cuts causally reduce product quality at the firm‐level (product‐level) by 5.3% (8.6%). A plausible mechanism appears to be the output and export expansion, which crowd out human capital and thus undermine quality. The results are more pronounced for non‐state‐owned firms, firms under high tax reinforcement effort, and firms subjecting to high financial constraints. This study provides clear policy implications by shedding light on the unintended consequences of tax incentives on export product quality.

Socio-economic and environmental impacts of the iron ore resource tax reform in China: A CGE-based analysis

With the acceleration of the resource tax reform in China, the ad valorem tax reform of the iron ore resource tax has become a hot topic. It is important to consider how to effectively play the regulating effect of China's iron ore resource tax so as to achieve iron ore industry's sustainable development through circular economy. However, no analyses of the proposed ad valorem tax reform have thus far been conducted. To bridge this gap in the literature, we adopt a computable general equilibrium model to simulate the socio-economic and environmental impacts of different iron ore resource tax reforms from an economy-wide perspective. The results show that this reform has had a limited influence on reducing the tax burden in the iron ore industry. However, we find that adopting a 1% ad valorem tax rate would enhance the competitiveness of domestic iron ore enterprises and reduce dependence on iron ore imports. In addition, if the resource tax is halved or a 1% ad valorem tax rate in implemented, GDP and household welfare would both rise; however, a 3% or 6% ad valorem tax rate would have a negative impact on GDP and household welfare. Finally, a lower (higher) ad valorem tax rate would increase (decrease) carbon dioxide emissions and carbon intensity. However, if a carbon tax policy was adopted under the low ad valorem tax rate policy, the disadvantageous environmental impact could be significantly improved and the tax burden of iron ore enterprises would also fall. Our research results suggest the following policy implications. First, given the core objectives of the iron ore resource tax reform and socio-economic impact, a lower iron ore resource tax rate should be introduced. Second, a carbon tax should be introduced and the indirect tax rate reduced by the same number of percentage points to ameliorate the possible negative environmental impacts of the reform.

Dividend Taxes, Investor Horizon, and Idiosyncratic Volatility

ABSTRACT We examine whether dividend tax induced lock-in reduces idiosyncratic volatility. The 2012 Dividend Tax Reform in China tied individual investors' dividend tax to the length of their shareholding period, with short-term individual investors entering into higher tax brackets. We find that high dividend firms experience a reduction in idiosyncratic volatility, relative to low dividend firms, after the reform. The effect is more pronounced when high dividend firms have more retail investors and exhibit greater uncertainty. High dividend firms also experience a reduction in stock price crashes. Finally, with reduced trading by individual investors who are likely less informed, earnings announcements of high dividend firms trigger less trading volume during the event window post-reform, but enable more complete price reactions. We conclude that dividend tax induced lock-in, through discouraging short-term individual investors' trading, stabilizes the market and improves share price informativeness. JEL Classifications: G12; G14; G35; F38.

Industrial Policy in China: Some Intended or Unintended Consequences?

The authors explore the impact of a 2004 tax reform in China that reduced the value-added tax (VAT) on investment goods. Although the goal of the reform was to encourage upgrading of technology, results suggest there was no significant increase in fixed investment, new product introductions, or productivity. Rather, the authors find that firms shifted the composition of investment toward machinery and increased the capital intensity of production, which is consistent with a fall in the price of capital relative to labor. As a result, employment fell significantly in the treated provinces and sectors. Results are robust to a variety of approaches and suggest that the primary impact of the policy has been to induce labor-saving growth. In 2009, the VAT reform was extended to the rest of China.

Business tax to value-added tax reform in China

Purpose This paper aims to examine the indirect tax reform process in China. Specifically, it examines the reform of business tax to value-added tax. Inefficiencies within the new tax system are identified and discussed. The “business tax to value-added tax” reform was seen as an essential element in promoting the economic transition and stimulating the service industries (Jin and Jin, 2013). Design/methodology/approach The paper uses archival and current literature. In undertaking the study, the different periods of indirect tax are examined, prior to 1994, 1994-2012, the changes from 2012 culminating in the new 2017 regime. Attributes of “good” value-added tax (VAT) systems are covered as well as a comparison with New Zealand’s goods and services tax (GST). Findings The paper finds that to align with the international trend of indirect tax development and more efficiently accomplish the economic transition China needs to build a more neutral VAT system with fewer reduced rates and exemptions and the tax system have created tax inefficiencies and increased the compliance cost. VAT is imposing an increasingly significant impact on China’s national economy and industrial structure as well as accountants. Originality/value This is the first study that analyses the indirect tax reforms that are currently being implemented in China and as such has lessons for China but also for VAT/GST in general. We should not forget how special New Zealand’s GST is and the clarity of focus of those who implemented it!