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Youth League Academic Luncheon 100:Who Benefits from Corporate Tax Cuts for Small Firms?--Evidence from China

2023-11-13 08:44:15

Topic:Who Benefits from Corporate Tax Cuts for Small Firms?--Evidence from China

Lecturer:AssistantProfessorJie Zou,School of Economics, Shandong University

Time:12:15-13:15p.m.November16th, 2023

Venue:B321,Zhixin Building, Central Campus

Abstract:This paper studies how workers benefit from corporate income tax(CIT) cuts for small firms and provides evidence of the dynamic interaction betweenfirm investment and wage growth. We exploit the quasi -experiment inChina, where small firms are eligible for a tax cut of 50% or ten percentagepoints in CIT, conditional on their taxable profit being below a threshold. Wefirst document that firms bunch below the threshold and employ the donut-hole regression discontinuity design to estimate the impact of the tax cut. We findthat in the short run, the tax cut did not benefit workers as wages andemployment did not increase. However, the tax cut stimulated firm investment. Two years after the tax cut, wages grew faster among firms that enjoyed thetax cut, which is consistent with a higher growth rate of their firm size and productivity. Although firms allocated all the tax benefits to finance newinvestments and pay dividends in the short run, workers enjoyed an increaseof 0.51 dollars in wages per dollar of the tax cut, which is 42%of the total benefits, after two years of the tax cut.