The Structure of Business Taxation in China

Zhao Chen, Yuxuan He, Zhikuo Liu, Juan Carlos Suárez Serrato, Daniel Yi Xu

Chapter in NBER book Tax Policy and the Economy, Volume 35 (2020), Robert A. Moffitt, editor (p. 131 - 177)
Conference held September 24, 2020
Published in June 2021 by University of Chicago Press
in The Tax Policy and the Economy Series

This paper documents facts about the structure of business taxation in China using administrative tax data from 2007 to 2011 from the State Taxation Administration. We first document the importance of different business taxes across industries. While corporate income taxes play an important role for manufacturing firms, these firms also remit a large share of their tax payments through the value-added tax system, through the excise tax system and through payroll taxes. Gross receipts taxes play an important role for firms in other industries, leading to spillovers that may affect the overall economy. Second, we evaluate whether the structure of China’s tax revenue matches its stage of development. A cross-country comparison of sources of government revenue shows that China collects a high share of tax revenue from taxes on goods and services and a high share of income tax on corporations. Finally, we study whether firm-level differences in effective tax rates can be an important source of allocative inefficiencies. Decomposing the variation in effective tax rates across firms, we find that government policies, including loss carry-forward provisions and preferential policies for regional, foreign, small, and high-tech firms, have significant explanatory power. Nonetheless, while effective tax rates vary along a number of dimensions, tax policy does not explain the large dispersion in the returns to factors of production across firms.

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Document Object Identifier (DOI): 10.1086/713495