How Do Tax Cuts Affect Firm Business Efficiency? Based on the Quasi-natural Experiment of Western Development Policy

Wu Huihang, Liu Xiaobing, Ji Yongbao

Journal of Finance and Economics Vol. 43, Issue 04, pp. 55 - 67 (2017)  DOI:10.16538/j.cnki.jfe.2017.04.005

Abstract

The reduction in the costs of real economy enterprises and the rise in their economic efficiency are the core content of the supply-front reform in China and the tax cut policy is the most important. This paper takes the western development policy as a quasi-natural experiment, and uses the difference-in-difference method to study the effect of tax cuts on the real economy based on micro data of manufacturing enterprises from 1998 to 2007. It comes to the results as follows:the tax cut policy can stimulate the development of real economy, the reduction in nominal tax rates by 1% leads to the rise in firm business efficiency by 0.38%-0.75% at average. The tax cuts have direct and indirect effects on firm business efficiency. The direct effect shows that tax cuts are beneficial to the improvement of firm business efficiency. The indirect effect indicates that tax cuts can stimulate more entrepreneurial activities, and start-ups have higher business efficiency than remaining enterprises. The heterogeneity test shows that, compared with large enterprises, small firms are more sensitive to tax cuts, and the impact of tax cuts on firm business efficiency increases firstly and then reduces, showing a long-term convergence effect. This paper provides empirical evidence for how China's tax cuts affect firm business efficiency, and theoretical and empirical significance for future formulation of tax cut policy.

Keywords

tax cut policy; firm business efficiency; difference-in-difference