The Effects Of China’s Value-added Tax Reform On Corporate Innovation

Reasonable reduction of enterprise tax burden is an important part of the core task of "Cost Reduction" in the Supply-side Structural Reform(State Council No.48 2016).The Central Economic Work Conference in 2017 pointed out that tax reform should boost high-quality development.The 14 th Five-Year Plan for National Economic and Social Development of the People’s Republic of China and the Outline of Long-term Goals to 2035 clearly call for improving the modern taxation system and improving the fiscal,taxation and financial systems that meet the requirements of high-quality development.The Report on the Work of the Government stressed that boost the principal role of enterprises in innovation and pursue innovation-driven development(2021),increase incentives for enterprises to innovate,implement various incentive policies for innovation including tax incentives,and improve the quality of development through innovation(2022).It can be seen that corporate innovation is not only an important embodiment of high-quality development at the micro level,but also an important driving force for high-quality development.It is in line with that of enterprise innovation leading high-quality development and tax reform boosting high-quality development.China’s value-added tax(VAT)revenue accounts for nearly 40% of the total tax revenue.Thus,when discussing China’s tax reform and high-quality development,the relationship between VAT reform and high-quality development is essentially discussed.This dissertation attempts to investigate whether the VAT reform can stimulate corporate innovation,which is an important link to evaluate whether the VAT reform can boost high-quality development,and is of great significance for accomplishing the goal of the Supply-side Structural Reform and promoting high-quality development through the subsequent tax reform.This dissertation takes the A-share listed companies from 1999 to 2021 as the research sample,takes the policy objectives of China’s VAT reform as the foothold,constructs the analysis framework of the effects of the VAT reform on corporate innovation covering the three tax reduction mechanisms of “expanding the scope of input tax deduction,opening up the interindustry deduction chain and reducing the tax rate”,and investigate the effects of the VAT transformation,replacing business tax with VAT(RBTVAT)and the adjustment of VAT rate on corporate innovation and their mechanisms respectively.First,this dissertation examines the impact of the VAT transformation pilot on corporate innovation in Northeast China,paying special attention to the symbiotic impact of the corporate income tax policy implemented at the same time as the VAT transformation pilot.This dissertation uses the triple difference method to scientifically separate the innovation effects of the two kinds of policies,and thoroughly analyzes the different mechanisms of VAT transformation and income tax policy affecting enterprise innovation.The results show that:(1)the income tax policy in Northeast China significantly promoted firms’ innovation,while the pilot of VAT transformation failed to exert the expected innovation incentive effect,but in general,the total effect of the two tax policies on firms’ innovation is significantly positive.(2)Further analysis shows that,in terms of VAT transformation,firstly,there is no significant change in the tax refund received by pilot firms after the reform,indicating that pilot firms did not receive more tax refunds after the VAT transformation,reflecting that this round of VAT transformation pilot failed to play the theoretical expected tax reduction effect,and thus failed to significantly promote firms’ innovation.Secondly,by testing the policy effects of the second round of VAT transformation pilot and the nationwide implementation of VAT transformation,it is found that the second round of VAT transformation pilot applying “increment refund”standard still failed to significantly promote firms’ innovation.However,when the VAT transformation was implemented nationwide and the restriction of “increment refund” standard was removed,the incentive effect of the reform on firms’ innovation began to appear.This result indirectly verifies that the limitations of policy design will weaken the expected effect of the policy,that is,the overly strict and complicated "increment refund" standard is an important reason for the failure of the VAT transformation pilot in Northeast China to exert the innovation incentive effect expected from the theory.In terms of income tax policy,firstly,income tax policy significantly reduces corporate income tax expenditure and operating cash outflow,which can save funds needed for enterprise innovation.Secondly,the positive relationship between the income tax policy implementation and corporate innovation is more pronounced for firms in the subgroup that are more financially constrained,while firms with less financing constraints and abundant funds are not sensitive to tax policies.Therefore,it is proved that income tax policy promotes firms’ innovation by reducing cash outflow from taxes and fees and alleviating capital pressure.(3)The heterogeneity analysis that distinguishes the crossprovincial differences in banking industry competition,marketization of credit fund allocation and the degree of VAT enforcement shows that,firstly,the positive effect of income tax policy on corporate innovation is only effective for firms in provinces with less banking industry competition and less marketized credit fund allocation,which indicates that firms’ financing demands are more challenging to be satisfied in provinces with less banking industry competition and less marketized credit fund allocation because of the inefficiency of credit allocation in these provinces.In this case,the income tax policy incentives on firms’ cash flows stand out,effectively offset the effects of firms’ insufficient external financing,and thus strengthen the positive effect of income tax policy on corporate innovation.Secondly,the positive effect of VAT transformation pilot on corporate innovation is only effective for firms in provinces with looser VAT enforcement,which indicates that when firms are more likely to get tax refunds or get more tax refunds,and thus have more funds for innovation,the VAT transformation can play a significant role in stimulating innovation.Finally,the impact of the VAT transformation pilot on firms’ innovation is negative and statistically significant for firms in provinces with less banking industry competition and less marketized credit fund allocation.This indicates that firms in provinces with less banking industry competition and less marketized credit fund allocation are more likely to experience a shortage of credit funds and are more sensitive to changes in tax policy.Therefore,the VAT transformation pilot fails to alleviate pilot firms’ tax burden but even weakens the income tax policy’s positive effects,which results in negative expectation of future cash flows and less corporate innovation in pilot firms with financial constraints.Secondly,this dissertation examines the effects of RBTVAT on corporate innovation,takes the gradual progress of RBTVAT by regions and industries as the time node,and uses PSM and DID method respectively to test the effects of RBTVAT pilot in Shanghai,eight provinces and nationwide on corporate innovation,paying special attention to the spillover effect of RBTVAT on manufacturing enterprises.This dissertation investigates the different mechanisms through RBTVAT influences service industry and manufacturing industry’s innovation.The results show that:(1)Compared with non-pilot service firms,RBTVAT pilot in Shanghai,eight provinces and nationwide has significantly promoted firms’ innovation.(2)Mechanism analysis shows that,in terms of the “tax burden effect”,RBTVAT pilot in Shanghai,eight provinces and nationwide has insignificantly reduced the turnover tax burden of pilot enterprises,that is,the RBTVAT has failed to significantly reduce the turnover tax burden of pilot enterprises,and the“tax burden effect” mechanism has not been certified.In terms of the “specialization and division effect”,first,RBTVAT pilot in Shanghai,eight provinces and nationwide significantly improved the specialization and division level of service enterprises,which passed the Sobel test,indicating that the specialization and division level played a significant intermediary role in the relationship between RBTVAT and corporate innovation.Second,the operating income and cash received from selling goods and providing services of pilot service enterprises increased significantly after RBTVAT,indicating that they have obtained more outsourcing business after RBTVAT,further verifying the deepening of the division among industries.Meanwhile,the increase of cash inflow can provide financial support for firms’ innovation and ultimately contribute to firms’ innovation.Third,the promotion effect of RBTVAT on corporate innovation is more obvious in the firms with lower degree of specialization,which verifies that improving the degree of specialization of firms is the mechanism through RBTVAT promote corporate innovation.To sum up,the “specialization and division effect” mechanism is proved.(3)The further analysis on the spillover effect of RBTVAT shows that,first of all,compared with non-pilot service enterprises,RBTVAT significantly promotes manufacturing enterprises’ innovation.Secondly,the dynamic effect analysis of RBTVAT and manufacturing enterprises’ innovation found that the promoting effect of RBTVAT on manufacturing enterprises’ innovation began to appear in 2012,and the policy effect gradually increased with the expansion of the pilot scope.Finally,the mechanism analysis found that RBTVAT significantly reduced turnover tax burden of manufacturing enterprises and improved the specialization and division level of manufacturing enterprises.The above results all passes the Sobel test,indicating that the turnover tax burden and the specialization and division level play intermediary roles between RBTVAT and manufacturing enterprises’ innovation.Finally,this dissertation uses time-varying DID method to investigate the effect of VAT rate adjustment on corporate innovation.Reducing tax rate is the most direct way to reduce tax.This dissertation analyzes the mechanism of VAT rate adjustment affecting enterprise innovation from the theoretical level and provides empirical evidence.The results show that:(1)the adjustment of VAT rate significantly promotes corporate innovation.(2)The mechanism analysis shows that,first of all,when firms’ cash expenditure of taxes and fees is larger and the internal financial situation is worse,the VAT rate adjustment has a greater promoting effect on corporate innovation,indicating that the VAT rate adjustment can promote corporate innovation through reducing firms’ VAT expenditure and improving firms’ after-tax cash flow.Secondly,when firms’ debt financing situation is worse,the VAT rate adjustment plays a greater role in promoting corporate innovation.Therefore,it is proved that the VAT rate adjustment can promote corporate innovation through improving the debt financing situation.Finally,the VAT rate adjustment significantly reduces firms’ debt financing costs,which improves firms’ debt financing environment and provides financial support for corporate innovation activities.(3)The heterogeneity analysis shows that,first,when the price elasticity of product demand is greater and firms’ bargaining power is weaker(i.e.,the difficulty of tax burden shifting is greater),enterprises are more affected by VAT rate adjustment,which shows that VAT rate adjustment has a more obvious promoting effect on corporate innovation.Second,when enterprises belong to non-state-owned enterprise,firms’ mortgage guarantee ability is worse,and the regional financial development level is lower(i.e.the external financing is more difficult),the VAT rate adjustment plays a prominent role in increasing enterprises’ internal accumulation and alleviating internal financing constraints,effectively making up for the shortage of external financing,which shows that the VAT rate adjustment has a more obvious promoting effect on corporate innovation.(4)The further analysis based on firms’ input and output tax structure shows that,first,in terms of output tax structure,the promotion effect of VAT rate adjustment on corporate innovation does not exist in enterprises with the main tax rate of 6%,but exists significantly in the enterprises subject to other tax rates.This is because for the former,its applicable output tax rate has not changed in the three tax rate adjustments,but its input tax rate has decreased due to the reduction of tax rate,resulting in the decrease of input tax and the increase of VAT payable,and it is difficult to enjoy the tax reduction dividend of the tax rate reduction,which ultimately shows that enterprises’ innovation does not increase significantly.Second,in terms of input tax structure,the promotion effect of VAT rate adjustment on corporate innovation only exists in enterprises with lower intermediate input rate,but does not exist in enterprises with high intermediate input rate.This is because for the latter,the change of the input tax has a greater impact on the VAT payable,and their VAT payable is greatly affected by the reduction of input tax rate,the more likely it is that the decrease of the input tax will significantly lead to the increase of the VAT payable,and ultimately firms’ innovation will not significantly increase.This dissertation’s contributions are as follows:(1)It creates the framework system for analyzing the innovation effect of China’s VAT reform,highlighting the systematic test of the innovation effect of China’s VAT reform.This dissertation arranges the research content from the overall perspective of China’s VAT reform,comprehensively and systematically examines the short-term,long-term and dynamic causal effects of China’s VAT reform on enterprise innovation,and makes up for the shortcomings of existing literatures that only limit the research perspective to the VAT transformation and RBTVAT.At the same time,it promotes and improves the existing literature in the aspects of research content,research design and mechanism analysis,and puts forward targeted and operable policy suggestions from the four levels of policy making departments,governments,tax collection and administration authorities and enterprises,which can be referred to by the management authorities.(2)It expands related academic researches on VAT and supplements relevant literatures on micro effects of VAT reform.Based on China’s institutional background,this dissertation constructs the analysis framework of the effects of the VAT reform on corporate innovation covering the three tax reduction mechanisms of “expanding the scope of input tax deduction,opening up the interindustry deduction chain and reducing the tax rate”,and investigate the effects of the VAT transformation,replacing business tax with VAT(RBTVAT)and the adjustment of VAT rate on corporate innovation and their mechanisms respectively.This dissertation analyses the different mechanisms of the effects of the three VAT reforms on corporate innovation from the theoretical level and provides empirical evidence,which is not only a useful supplement to the research on the micro effect of VAT reform,but also a full embodiment of “research based on the motherland”.(3)For the first time,this dissertation includes institutional design factors into the analysis framework of VAT reform innovation effect,providing empirical evidence that institutional design factors affect the actual effect of VAT reform.This dissertation takes the influence of institutional design factors on the actual effect of VAT reform into consideration in the innovative effect analysis framework of China’s VAT reform.It is suggested that policy makers should pay special attention to the mutual influence of different policies at the same time when designing specific policies,reasonably formulate applicable standards for policies,avoid frequent changes of policies in the short term,maintain the continuity and stability of policies,and prevent the high threshold of policy application and high compliance costs from damaging the actual benefit scope of the reform,resulting in the actual effects of policies deviating from the expected.This dissertation reveals the deficiencies of VAT policy design and the weak links of policy implementation through the results of policy effect test,which lays a solid foundation for the subsequent policy optimization and implementation of VAT reform.(4)Innovation of empirical test methods.This dissertation establishes a method system for scientific identification of the innovation effect of China’s VAT reform: on the basis of DID,emphasizing its applicable premise to ensure the appropriateness of this method.At the same time,introducing new methods such as PSM,DDD and reverse DID to separate the causal effect of the three VAT reforms themselves,which improves the shortcomings of existing research on empirical methods.The comprehensive application of the above methods enhances the scientificity and reliability of this dissertation’s research conclusions,which is also an important aspect of reference value in this dissertation.