American Economic Review Vol. 111 No. 7 2021
Notching R&D Investment with Corporate Income Tax Cuts in China
Abstract
We study a Chinese policy that awards substantial tax cuts to firms with R&D investment over a threshold or “notch.” Quasi-experimental variation and administrative tax data show a significant increase in reported R&D that is partly driven by firms relabeling expenses as R&D. Structural estimates show relabeling accounts for 24.2 percent of reported R&D and that doubling R&D would increase productivity by 9 percent. Policy simulations show that firm selection and relabeling determine the cost-effectiveness of stimulating R&D, that notch-based policies are more effective than tax credits when relabeling is prevalent, and that modest spillovers justify the program from a welfare perspective.
- DOI
- 10.1257/aer.20191758
- Volume
- 111
- Issue
- 7
- Pages
- 2065-2100
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref