Dynamic Change Of Corporate Tax Burden And Investment Decision

Since reform and opening up,the economy of China has developed rapidly,and the way of economy development has transferred from rapid growth to the high-quality development.In the process of transformation,it is still a problem how investment plays the role of the internal driving force to promote technology innovation,accelerate the process of marketization,and achieve long-term sustainable economic development.The report of the 19 th national congress of the CPC pointed out that with the continuous optimization of the economic structure,further deepen investment reform needs to be promoted to play the key role of investment in optimizing the supply structure.As corporate investment is an important part of economic investment,understanding the rational and irrational factors of corporate investment decisionmaking will help deepen the supply-side structural reform and promote the sound and rapid development of China's economy.Tax,an important factor affecting investment,has been a hot topic in the research field of corporate finance.This paper analyses China's unique "championship" political promotion system,tax system including tax policy making and tax collection and management efforts by local governments,and studies the impact of dynamic changes in corporate tax burden on investment decisions.First of all,based on the background of China's political and economic system,this paper depicts that local governments have strong incentives to intervene in enterprise tax burden through tax competition or tax grab under the "championship" political system.Compared with western countries,local government officials in China have a stronger incentive to intervene in the economic development of their jurisdictions due to the political promotion pressure associated with GDP growth.Local governments may carry out different industrial policies to adapt to economic development at different stages,and the local tax preferential policies will also be revised accordingly.Meanwhile,the implementation of tax collection and management intensity will also change with the adjustment of political and economic goals.In order to promote regional economic development and attract outside investors to stimulate investment,local governments are more inclined to give preferential policies to companies and relax tax collection and administration to stimulate investment expenditure.It ensures that local governments occupy a dominant position in tax competition.The reform of the tax distribution system also increases the pressure on local fiscal expenditure.When local financial resources are in short supply,the government will increase tax revenue and seize the resources of enterprises in the region to make up the fiscal deficit.In other words,local tax preferential policies and collection and management are under change.At the same time,China's current overall tax system is not perfect,and the taxation styles of successive officials are different.With this actual background,the effective corporate income tax rate(ETR)is often in a state of great fluctuation.Thus,it is difficult for executives to accurately estimate the future ETR.Then,this paper studies the impact of tax uncertainty on enterprises' physical investment decisions through empirical analysis.The research results show that tax uncertainty decreases the investment expenditure,the overinvestment and leads to underinvestment.This paper further studies the influence of corporate characteristics and local government's behavior on the relationship between tax uncertainty and physical investment.When the effective corporate income tax rate of the current period is higher than the average rate of the same industry,the double pressure of tax rate fluctuation and high tax rate makes managers more risk-averse.So high tax rate strengthens the inhibiting effect of tax uncertainty on the enterprise's physical investment expenditure.When the financing constraint of the company is high,managers are more worried about the fluctuation of cash flow caused by the tax uncertainty.They tend to hold on the cash instead of investing,which makes the inhibition of tax uncertainty on physical investment more significant.When the local government has a strong degree of intervention in enterprises,it is easier for the government to influence enterprises' tax burden through local tax policy making and tax collection and management,which makes harder for executives to forecast corporate effective tax rate in the future.So high government intervention enhances the negative impact of tax uncertainty on enterprises' physical investment.When enterprises are supported by industrial policies,the managers' precautionary psychology and the degree of risk aversion can be alleviated.So the negative correlation between the tax uncertainty and the physical investment is weaken.Compared with physical investment,R&D investment has obvious characteristics,such as high uncertainty,high return,long investment cycle.Innovation literatures generally believe that managers are more inclined to take R&D investment as the initiative strategy in the uncertainty environment to seize market share,maintain their position in the industry.Therefore,after studying the impact of tax uncertainty on physical investment,this paper studies the impact of fluctuation of enterprises' effective tax rate on R&D investment.The results show that tax uncertainty inhibits the scale and intensity of enterprise R&D investment,indicating that managers attach more importance to the "prevention effect" caused by tax uncertainty that cannot be effectively controlled by themselves rather than the "winner effect".Further research shows that compared with non-local state-owned enterprises,local state-owned enterprises can get more tax information and policy support due to their natural property right relationship with local governments.Thus,the negative effect of tax uncertainty on enterprise R&D investment is weaken in local state-owned enterprises.However,when the external macro environment fluctuates greatly,the precautionary psychology of the managers will be intensified,making the negative correlation between tax uncertainty and R&D investment more significant.Moreover,when the enterprise is in a monopolized industry,due to the existence of industry threshold,the enterprise has little fear that new entrants will seize market share in the future.So the negative impact of tax uncertainty on the R&D investment is weaken in the monopolized industry.In addition,this paper makes an in-depth study and finds that the fluctuation of effective tax rate also has a negative impact on the innovation performance of enterprises,reducing the number of patents obtained by enterprises in the future.Finally,this paper examines whether tax uncertainty will cause the anchoring effect of managers in corporate total investment decisions.Anchoring effect refers to the fact that decision-making individuals are not able to rationally calculate the expected value of future results based on various and uncertain situations.Instead,they tend to rely on and attach too much importance to some specific information,which leads to the deviation of decision-making results from the optimal level.The fluctuation of the enterprise's effective tax rate provides an uncertain environment for the investment decision.Will tax uncertainty cause managers to pay too much attention to some specific information? This paper studies the impact of the irrational high taxes anchoring effect on enterprise investment decision based on the tax perspective,the decisive factor of investment,to measure the anchoring value.The results find that tax uncertainty leads to executives anchoring on high tax.When the current effective rate is high,executives would be irrational to forecast the next term of the company's effective tax rate will be high and reduce the next term of the corporate total investment.It shows that there is significant irrational tax rate anchoring effect on corporate investment decision and inner anchor effect is stronger than the external anchor effect.Furthermore,referring to previous literatures,this paper studies whether the professional competence and management experience of decision makers will affect the anchoring effect in investment.It finds that senior executives with fiscal and tax backgrounds,with long tenure,and with old age can alleviate the anchoring effect in the total investment decision of enterprises.However,compared with male executives,female executives behave in a more prudent way,which intensifies the effect of high tax rate anchoring on the total investment of enterprises.In addition,the anchoring effect of high tax rate is based on the tax uncertainty.Therefore,this paper further studies the influence of tax rate volatility on the relationship between tax rate anchoring and total corporate investment,and finds that higher tax rate volatility intensifies the tax rate anchoring effect in investment.Finally,this paper finds that the tax rate anchoring effect in investment inhibits the total investment of enterprises,which significantly reduces the performance and value of companies.The conclusion of this paper complements and expands the previous research on taxinvestment theory,and describes the influence of both rational and irrational factors on the management decision.This paper finds executives will reduce future investment in the face of dynamic tax rate changes.The results show that tax uncertainty has the profound influence on enterprise physical investment and R&D investment,and reveal that tax uncertainty leads to executives' irrational high tax rate anchoring behavior which reduces the enterprise value.If enterprises undertake effective tax rate more smoothly,it is benefit to control executives' precautionary motive and irrational anchor in the investment management,and improve the efficiency of investment.It is not only referring to the enterprise investment decision-making and government revenue management,but also actively practicing the spirit of the 19 th CPC National Congress,"investment should be utilized to optimize the supply structure",and promoting the reform of tax system.The main research innovation of this paper can be summarized as the following four aspects.Firstly,this paper enriches the research on influencing factors of investment decisions from the perspective of tax uncertainty and tax rate anchoring,two dynamic characteristics of corporate tax burden(Chen and Luo,2012;Tan et al.,2017;Malmendier and Tate,2005).Previous research studied enterprise investment decision from macroeconomic characteristics and company characteristics,respectively.Based on the influence of tax on enterprises investment,this paper combines with China's unique system background to deepen in the past research on tax economic consequences,and enriches the specific factors influencing investment decisions at the company level.Secondly,this paper links the tax burden borne by enterprises with uncertainty,which enriches the research on influencing factors of innovation activities.At present,there is no clear conclusion on how the corporate tax burden affects R&D investment.Some scholars affirmed the positive effect of tax incentives(Mansfield,1986;Wang,2011;Li et al.,2016),but others pointed out that drastic tax policies stimulate enterprises' rent-seeking behavior,which is not conducive to enterprises to carry out truly needed innovation activities(Wallsten,2000;Rodrik,2004;Lin et al.,2013).This paper verifies the inhibitory effect of tax uncertainty on R&D input and output,providing a new perspective for further exploring the impact of tax burden on enterprise innovation.Thirdly,the existing literature on uncertainty mainly focuses on political uncertainty,environmental uncertainty and economic policy uncertainty(Ghosh and Olsen,2009;Xu et al.,2013;Xu,2014;Wang and Song,2014).Based on our country economic system and capturing microcosmic tax display of enterprise level performance,this paper finds that there is the fluctuation of the dynamic changes of the corporate actual tax burden.Using the perspective of tax,it provides a new research at the point of view of the uncertainty and expands uncertainty factors affecting the mechanism of enterprise management decision.This paper finds that executives show preventive psychology and risk aversion attitude,unwilling to make physical investment and innovation activities when they face with tax uncertainty.It enriches the study on the economic consequences of tax uncertainty(Hasset and Metcalf,1999;Hanlon et al.,2017).Fourthly,from the perspective of tax rate anchoring,this paper enriches the cross-study of psychological theory in the financial field,and confirms the existence of anchoring effect in enterprise investment decision-making.Previous anchoring value is only limited to the research object itself(George and Hwang,2004;Zhu et al.,2017;Chen and Li,2016).In this paper,the anchoring value is set from the perspective of the influencing factors(tax burden)of the research object(total enterprise investment)to study the influence of high tax rate anchoring on the total enterprise investment decision.It enriches relevant researches on anchoring effect and provides evidence support for behavioral economics theory.