Unintended consequences of tax incentives on firms' human capital composition: Evidence from China

Zhiqi Zhao*, Yong Yue, Wangshuai Wang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

This paper investigates the unintended effects of tax incentives on firms' human capital composition. By exploring data on A-share listed firms from 2015 to 2020 and utilizing a quasi-experimental design, we examine the impact of the 2018 value-added tax (VAT) credit refund policy on the human capital composition of firms' workforce. We find that treated firms increased the ratio of R&D employees by 0.61% relative to control firms. The incentive effect is more pronounced for firms in modern service sectors, mature firms, non-state-owned firms, and firms located in eastern regions. The mechanism reveals that the VAT policy, by refunding tax credits to pilot firms, alleviated internal financing constraints and prompted firms to increase investments in fixed assets and R&D expenditures. This enhanced the firms' human capital structure. Our study provides a novel perspective on how tax incentives unintentionally affect firms' human capital composition while also providing insights into further refining China's VAT credit-refund system in the post-COVID era.

Original languageEnglish
Article number102138
JournalChina Economic Review
Volume84
DOIs
Publication statusPublished - Apr 2024

Keywords

  • Human capital composition
  • Unintended effect
  • VAT credit refund

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