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Do regional tax incentive policies improve productivity?
Mengchao Zhao1, Xiang Xiao2, Jiaan Yang1
1School of Economics, Capital University of Economics and Business, Beijing, China.
Plos One
|August 27, 2024
Summary
Regional tax incentives boost firm investment but hinder efficient resource allocation in old industrial areas. Policies need better coordination with market reforms for sustainable development.
Area of Science:
- Economics
- Regional Science
- Public Policy
Background:
- Old industrial areas face transformation challenges, impacting regional development.
- Regional tax incentives are a key policy tool for revitalizing these areas.
- China's Value-Added Tax (VAT) reform provides a unique case study for evaluating such policies.
Purpose of the Study:
- To assess the impact of regional tax incentives on sustainable development in traditional industrial areas.
- To explore how tax incentives affect firm productivity, investment, innovation, and financing constraints.
- To analyze the broader effects on market efficiency and economic growth in China's old industrial bases.
Main Methods:
- Utilizing a comprehensive industrial enterprise database.
- Employing a Propensity Score Matching-Difference in Differences (PSM-DID) approach.
- Analyzing the effects of China's inaugural Value-Added Tax (VAT) reform.
Main Results:
- Tax incentives stimulate enterprise investment and alleviate financing constraints, particularly for firms with high constraints, state-owned, and monopolistic enterprises.
- However, incentives do not improve investment efficiency or spur innovation.
- Policies impede productivity growth by hindering firm entry/exit, promoting 'zombie firms', and distorting resource allocation.
Conclusions:
- Regional tax incentives have mixed effects, improving TFP for constrained firms but negatively impacting market efficiency and endogenous growth.
- Coordination with market-oriented reforms is crucial for optimizing tax incentive policies.
- Further enrichment of regional tax incentive strategies is recommended for China's old industrial bases.
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