The Effect Of VAT Rate Reduction On Labor Income Share

In October 2022,the 20 th Party Congress was held on schedule,in which the report stressed that the need to promote the common wealth of all people as an important task in promoting the continuous development of China’s socialist modernization has laid a solid foundation for us to understand in depth the importance of common wealth in promoting the process of sustainable economic development in China,and even to further actively promote the common enjoyment of the fruits of economic development by all people in China under the new situation.In addition,the report also proposes that efforts should be made to achieve a further increase in our level of economic development,per capital income of residents,labour output and labour remuneration.Taxation is a macro-control instrument and there is a close link between it and the share of labour income.A necessary requirement for promoting sustainable economic development is to explore in depth the relationship between taxation and the share of labour income.Among the many types of taxes,VAT,as a turnover tax,is one of the main sources of tax revenue in China and provides an economic source for the country’s macroeconomic regulation.It is noteworthy that existing literature studies do not provide clear conclusions for the time being on how changes in VAT rates affect the VAT burden on enterprises,how they specifically affect the share of labour income of enterprises and the specific transmission mechanisms involved.On 1 April 2019,China implemented a major reform of VAT by significantly reducing the VAT rate.This will have a significant impact on the production and operation of enterprises,as well as on the income level of workers in economic development and their share in the distribution of income.In order to clarify the tax effect of the VAT rate reduction policy on enterprises and the impact on the share of labour income of enterprises,this paper analyses the literature on tax burden and labour income share in a comprehensive manner,taking into account the conclusions drawn from relevant articles and trying to avoid their shortcomings,and explores in depth the impact of the VAT rate reduction on the share of labour income of enterprises by analyzing on the relevant literature.In addition,a CES production function model is developed and mathematically derived to analyse the specific impact of the VAT rate reduction on the labour income share of enterprises,the mechanism of the impact and the heterogeneity.Through literature as well as theoretical modelling,this paper makes relevant hypotheses for the study.The VAT rate reduction policy in 2019 will be used as an exogenous policy shock,sets the relevant variables to construct a double difference model,takes the financial data of all A-share listed companies from 2016 to 2021 as the sample data for the empirical analysis,makes a basic regression,uses propensity score matching and conducts a robustness test on the regression results.At the same time,channel variables are selected to conduct channel tests on the data to verify the possible channel influence mechanism on the share of labour income of enterprises,and finally,heterogeneity analysis is conducted.Based on the analysis,there are three conclusions can be used: first,the policy of VAT rate reduction in 2019 has a close relationship with the labour income share at the micro-firm level,and the implementation of the policy leads to a significant reduction in the labour income share of firms.Second,the paper finds through mechanism analysis that the VAT rate affects the labour income share of enterprises through two channels.First,firms’ investment.At the same time,the reduction in the VAT rate reduces the tax burden of enterprises and has the effect of increasing the total factor productivity of enterprises,which in turn promotes the technological progress of enterprises,and this results in a reduction in the share of labour income of enterprises.Third,in terms of heterogeneity,non-state enterprises and export-oriented enterprises react more sharply to the VAT rate reduction than state-owned enterprises and non-export-oriented enterprises,and the share of labour income decreases to a greater extent for non-state enterprises and export-oriented enterprises than for state-owned enterprises and non-export-oriented enterprises.The policy implications of the above findings are as follows: First,the impact of tax policies on the labour income share of enterprises should be fully understood.Secondly,the fairness of income distribution should be enhanced and the level of labour remuneration for low-income groups should be increased;thirdly,a sound distribution system should be established to ensure fairness of income while narrowing the income gap.In addition,the personal income tax system should be improved to give more tax concessions and support to low-income groups.Fourthly,the supporting system should be improved,infrastructure should be built and the employment environment should be optimized.Finally,further policy support should be given to non-state enterprises and exporters.