Tax Compliance and Investment Incentives: Firm Responses to Accelerated Depreciation in China

We evaluate the effects of a Chinese accelerated depreciation policy that occurred in 2014 on firm investment. We present three findings. First, on average, the policy increased firms’ investment in eligible capital, especially the purchase of equipment and machines. Second, the policy effects are s...

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Bibliographic Details
Published inJournal of economic behavior & organization Vol. 176; pp. 1 - 17
Main Authors Fan, Ziying, Liu, Yu
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.08.2020
Subjects
Accelerated depreciation
Firm investment
Tax compliance
Tax incentives
Accelerated depreciation
Tax incentives
Tax compliance
D22
Firm investment
H32
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Summary:We evaluate the effects of a Chinese accelerated depreciation policy that occurred in 2014 on firm investment. We present three findings. First, on average, the policy increased firms’ investment in eligible capital, especially the purchase of equipment and machines. Second, the policy effects are stronger for larger firms, firms with more cash, and firms with better access to finance, which tend to be less financially constrained but have better tax compliance. Third, the effect magnitude increases with imputed county tax enforcement but decreases with provincial tax fraud rate. These results shed light on the importance of improving tax compliance in making tax incentives effective.
ISSN:0167-2681
DOI:10.1016/j.jebo.2020.04.024