Essays of Business Taxation Policies in Developing Countries

Abstract

Business taxation is an important source of fiscal revenue for governments around the world, and it is frequently used by governments to provide short-term economic stimulation while also promoting long-term prosperity. Understanding the structure of business taxes and the effects of corporate tax policy in developing nations is critical to understanding how emerging economies thrive. Business taxation policies in developing economics differ from those in developed economics due to differences in policy design and execution. This dissertation consists of two essays on business taxation policies in China. Specifically, this dissertation examines the structure of business taxes and the impacts of a consumption tax reform in China.The first and second essays make use of a nationwide tax survey dataset from China. In the first essay, which has been published in Tax Policy and the Economy(Chen, He, Liu, Serrato, and Xu, 2021), my coauthors Zhao Chen, Zhikuo Liu, Juan Carlos Su\'arez Serrato, Daniel Yi Xu and I examine the structure of business taxation in China and present the stylized facts regarding China’s business taxation system. The essay documents important facts about the structure of business taxation in China using administrative tax survey data from 2007 to 2011 from the State Taxation Administration. We find that while corporate income taxes are important, manufacturing companies also pay a significant portion of their taxes through the value-added and excise tax systems, as well as payroll taxes. Second, we conduct cross-country analysis to examine whether China's tax revenue structure aligns with its stage of development. We find that China receives a large amount of tax revenue via taxes on goods and services, as well as a large share from income tax on businesses. Finally, we test whether differences in effective tax rates across firms could be a significant source of allocative inefficiencies. We find that government policies, such as loss carry-forward provisions and preferential policies for regional, foreign, small, and high-tech enterprises, contribute to a considerable share of variation when decomposing the difference in effective tax rates among firms. Even though effective tax rates differ in a variety of ways, tax policy does not account for the large dispersion in the returns to factors of production across firms.In the second essay, I investigate the direct and spillover effects of the reform of replacing gross-receipt tax (GRT) with value-added tax (VAT) in China’s tax system. I start with a two-sector model of intermediate goods production to demonstrate that in some cases VAT preserves production efficiency whereas gross-receipt tax does not, and to illustrate the implications of replacing GRT with VAT. My analysis shows that tax-induced production distortion amplifies along the production chain as a result of distorted input pricing effects. Second, I study the reform of replacing GRT with VAT in China using China's administrative tax survey to assess changes in overall economic efficiency. The interconnection of sectors within a production network makes estimating causal effects difficult, particularly when the effects may spread to non-targeted sectors. I use a difference-in-difference regression approach with three adjustable treatment and control group specifications to account for spillover effects. Based on my analysis, I find strong evidence that replacing GRT with VAT will significantly increase firms' income, capital, and employment.