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

Abstract

This 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.

Tax Policy and Total Factor Carbon Emission Efficiency: Evidence from China’s VAT Reform

“…Firstly, Referring to Cheng et al [ 37 ] and Li and Cheng [ 5 ], we first measured the new TFCEE indicators using DDF and EBM and replaced the dependent variables’ indicators before conducting the estimation analysis. Secondly, the VAT reform was carried out nationwide in China in 2009, so we draw on the method of Kong and Xiong [ 21 ] to examine only the several VAT reforms before 2009. The robustness results are shown in Table 5 .…”

“…To ensure that the benchmark results are not affected by measurement errors and other factors, we first measured the new TFCEE indicators using DDF and EBM and replaced the dependent variables’ indicators before conducting the estimation analysis. Secondly, the VAT reform was carried out nationwide in China in 2009, so we draw on the method of Kong and Xiong [ 21 ] to examine only the several VAT reforms before 2009. The results of the robustness analysis all suggest that VAT reform has a significant positive impact on urban TFCEE, which is consistent with the previous benchmarking results.…”

“…The VAT reform has been adopted by over 140 developed and developing countries as the most commonly used type of tax [ 21 ]. Value Added Tax (VAT) is a tax on the difference between the gross sales and the inputs purchased from other businesses.…”

“…Secondly, tax incentives can also provide tax rebates for green industries to encourage green technological innovation while imposing high tax rates on high polluting and emitting industries to change the market structure and thus promote total factor carbon emission efficiency. Thirdly, the VAT reform relieves the financing constraints of enterprises [ 21 ] and stimulates them to increase their R&D and capital investment in technology and technological innovation. Technological innovation is the main driver of total factor carbon emissions efficiency [ 25 , 26 ], as it increases factor inputs per unit of product and reduces waste gas emissions.…”

Can the green credit policy enhance firm export quality? Evidence from China based on the DID model

“…Regarding export quality, scholars have examined factors influencing the improvement of China's export quality from various perspectives. Some studies argued that the improvement of China's export quality is mainly due to internal factors such as financing constraints (Phillips and Sertsios, 2013), the minimum wage standard (Xu and Wang, 2016), the degree of technology market development (Dai, 2018), the liberalization of foreign entry (Hou et al, 2021), and tax incentives (Kong and Xiong, 2021). However, the majority of the literature agreed that the export quality of Chinese firms is shaped by external factors, such as import (Xu and Mao, 2018), foreign direct investment (Li et al, 2019), the liberalization of trade (Chen et al, 2017;Shen and Mao, 2017), trade barriers (Zhen and Zhen, 2020), and regional trade agreements (Sun, 2021).…”