Empirical Research on the Influences of VAT Reform on Regional Factor Input Investment According to China’s Prefecture Level Panel Data from 2002 to 2010

Abstract

From its transformation to expansion, the internally progressive logic of China’s Value Added Tax (“VAT”) reform has been ever-present in its scope for collections and deductions. An excellent sample of this could be seen in the decade of data preceding and following the V A T transformation in observing the implications of the VAT reform. By using the Two-Firms Model and China’s 255 prefecture-level cities’ panel data, this paper applies DID to test the impact of the VAT reform upon regional investments, employment, and wages overall. Many key conclusions arose. This includes that through layoffs rather than pay-cuts, the VAT transformation has promoted the “substitution of capital for labour”. Also, after “Business to VAT”, enterprises now prefer to use deductible outsourcing services rather than their own services, and that the VAT reforms and its accompanying time lag has seen more long-term impact than short term. Finally, the VAT reform has given birth to an "intertemporal tax avoidance" in mirroring observable postponing of investments. With the progressive advancement of “Business to VAT”, future research directions could include examining trends in empirical data to compare implications of differing VAT systems that accompany their disparate reforms.