China's Investment Tax Reform and Its Impact on Firms

The corporate tax reform in China that was implemented nationwide in 2009 was first introduced as a pilot program in 2004 in three northeastern provinces. The program consisted of two experiments – selected heavy industries received a VAT exemption and a bonus deprecation allowance while the rest of the manufacturing firms received bonus depreciation allowance. Employing double differencing with propensity score matching on a large census-type manufacturing firm-level data-set of unlisted firms, we find that both experiments led to an increased firm size, increased labor productivity (with reduced employment), and deteriorated profitability for the first two years with signs of recovery after three years of treatment. The firms receiving both VAT deduction and bonus depreciation exhibited some substitution between short-term and long-term debts, whereas firms receiving only bonus depreciation showed some increase in their overall debt