Corporate Tax Cuts for Small Firms: What Do Firms Do?

67 Pages Posted: 27 Oct 2021 Last revised: 28 Mar 2024

See all articles by Wei Cui

Wei Cui

University of British Columbia (UBC), Faculty of Law

Mengying Wei

University of International Business and Economics (UIBE) - School of Banking and Finance

Weisi Xie

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Jing Xing

Antai College of Economics & Management, Shanghai Jiao Tong University

Date Written: October 27, 2021

Abstract

What do small firms do when given a semi-permanent corporate income tax cut? We examine firm responses to a substantial reduction in the tax rate for small- and micro-profit enterprises (SMPE) in China, using gradual increases in the qualifying threshold during 2010-2016 for identification. Based on confidential tax returns, we find that newly qualified SMPEs with immediate tax savings increased investment and productivity, while there was no change in wages or payout to shareholders. There is some weak evidence the tax cut induced entry of micro-sized firms in financially constrained sectors. Yet its size-based design led to bunching and incentivized firms to slow down growth when they approached the size threshold.

Keywords: tax incentives, small firms, productivity, investment, firm entry

JEL Classification: D24, G30, H20, H25

Suggested Citation

Cui, Wei and Wei, Mengying and Xie, Weisi and Xing, Jing, Corporate Tax Cuts for Small Firms: What Do Firms Do? (October 27, 2021). Available at SSRN: https://ssrn.com/abstract=3950973 or http://dx.doi.org/10.2139/ssrn.3950973

Wei Cui

University of British Columbia (UBC), Faculty of Law ( email )

1822 East Mall
Vancouver, BC V6T1Z1
Canada

HOME PAGE: http://https://allard.ubc.ca/about-us/our-people/wei-cui

Mengying Wei

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Weisi Xie

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No. 1954 Huashan Rd.
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China

Jing Xing (Contact Author)

Antai College of Economics & Management, Shanghai Jiao Tong University ( email )

1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China
86 21 52301040 (Phone)

HOME PAGE: http://www.acem.sjtu.edu.cn/en/faculty/xingjing.html

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