Empirical Analysis of the Impact of Tax Incentive Policies on Corporate Investment Behavior in China
DOI:
https://doi.org/10.54097/yxs9zm07Keywords:
Tax incentives, corporate investment, value-added tax, enterprise income tax, financing constraints, investment efficiency, ChinaAbstract
Tax incentives are widely used to lower the effective cost of capital, strengthen enterprise cash flow, support technological upgrading, and encourage productive investment. China provides a particularly informative setting because tax policy has been repeatedly adjusted through value-added tax (VAT) reform, accelerated depreciation, enterprise income tax preferences, and targeted incentives for small and low-profit enterprises. This article examines how tax incentive policies affect corporate investment behavior in China by integrating the user-cost-of-capital framework with firm-level evidence from quasi-natural experiments. Rather than manufacturing a new regression dataset, the empirical section synthesizes evidence from published firm-level studies and sets out a reproducible empirical strategy that can be implemented with Chinese administrative tax or listed-firm panel data. The evidence consistently indicates that tax reductions can stimulate investment when firms are able to claim the incentives and face binding liquidity or financing constraints. Liu and Mao report that the 2004-2009 capital-tax reform increased investment among treated firms by 38.4 percent relative to controls, while Chen et al. identify a 36 percent increase following the VAT reform, driven partly by investment spikes. Evidence from small and low-profit enterprises also shows increases in fixed-asset and labor investment following income-tax relief. At the same time, accelerated depreciation introduced in 2014 and 2015 did not automatically generate additional investment, highlighting the importance of take-up, tax capacity, and policy design. The article therefore argues that the investment response is heterogeneous rather than uniform. Tax incentives are most likely to affect investment when they reduce the marginal user cost of capital and/or relax internal and external financing constraints, but poorly targeted thresholds can create bunching and weaken growth incentives. Policy recommendations emphasize transparent eligibility rules, stable incentives, improved take-up, and evaluation based on additionality and investment efficiency rather than tax relief alone.
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