Tax Policy and Lumpy Investment Behavior: Evidence from China's VAT Reform / Zhao Chen, Xian Jiang, Zhikuo Liu, Juan Carlos Suárez Serrato, Daniel Xu.

Format:

Book

Author/Creator:

Chen, Zhao.

Contributor:

National Bureau of Economic Research.

Jiang, Xian.

Liu, Zhikuo.

Suárez Serrato, Juan Carlos.

Xu, Daniel.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26336.

NBER working paper series no. w26336

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Tax Policy and Lumpy Investment Behavior

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

We incorporate the lumpy nature of firm-level investment into the study of how tax policy affects investment behavior. We show that tax policies can directly impact the lumpiness of investment. Extensive-margin responses to tax policy are key to understanding the effects of different tax reforms and to designing effective stimulus policies. We illustrate these results by studying China's 2009 VAT reform, which lowered the tax cost of investment and reduced partial irreversibility|the price gap between new and used capital. Using administrative tax data and a difference-in-differences design, we estimate a 36% investment increase. This effect is driven by investment spikes, which is consistent with the reduction of VAT-induced partial irreversibility. Using a dynamic investment model that fits the reduced-form effects of the reform, we show that policies that directly reduce the likelihood of firm inaction are more effective at stimulating investment.

Notes:

Print version record

October 2019.