Tax policy is a key measure to optimize the development environment of the private economy. Theoretically, tax and the private economy are hot issues in public economics research, and have accumulated rich academic achievements. Practically, with the continual promotion of large-scale tax and fee reduction and the cleaning up of tax incentives in China, the policy space of tax tools to attract private enterprises needs to be systematically evaluated. Due to the lack of a credible causal identification framework, little literature can give an answer to the relationship between tax policy and the entry and exit of private enterprises.

Based on the effective tax rates and the registration data of industrial and commercial enterprises in the prefecture-level cities of China, this paper uses causal inference methods to artificially construct two types of quasi-experiments: relative increases and decreases in effective tax rates across the country and in adjacent cities, and tests the causal effect of changes in effective tax rates on the number of private enterprises. The results show that the relative increases and decreases in effective tax rates have an asymmetric effect on private enterprises. That is, when effective tax rates increase, the number of private enterprises decreases significantly, but when effective tax rates decrease, the number of private enterprises does not change significantly. The phenomenon will be more serious in cities with lower administrative levels, located at provincial boundaries, with higher proportion of tertiary industries, and in a poorer business environment. In addition, the impact of relatively higher effective tax rates on the number of private enterprises has an adjacent effect, resulting in private enterprises’ flow to adjacent cities, and this flow tends to diminish with the expansion of geographic distance and the passage of time. This finding reveals the effect boundary and threshold of local governments’ use of tax incentives.

The marginal contributions of this paper are as follows: First, it reveals the essence of the tax and fee reduction policy, further clarifying the effect boundary of tax policy in the low tax-rate environment in China. Second, it clarifies the behavioral differences and dynamic characteristics of private enterprises in the face of changes in effective tax rates, providing a new perspective for the behavior of private enterprises. Third, it sets up a quasi-natural experiment of changes in effective tax rates by means of artificial shocks, which can fully reflect the relativity and exogeneity of changes in effective tax rates, and is a development of micro-econometric methods.