Does ownership affect the impact of taxes on firm behaviour? Evidence from China

Does ownership affect the way companies react to corporate taxation? This paper exploits key features of recent corporate tax reforms in China to shed light on the differential impact of taxation on companies under different broad ownership regimes – state-owned, collectively-owned, privately owned by domestic shareholders and privately owned by foreign shareholders. The existing literature on the taxation of state-owned companies has set out different hypotheses on how they might respond to taxes; but there have been no previous empirical studies on this question. We test alternative hypotheses by exploiting Chinese tax reforms in 2006 and 2008 which had differential effects on these groups of companies. First, the 2006 reform abolished a ceiling on the deduction of wages per worker for all domestically-owned firms. We find that - relative to foreign-owned companies - this led to a sizable increase of wages per worker in domesticallyowned private companies, an even larger increase in collectivelyowned enterprises, but no significant response in state-owned enterprises. Second, the 2008 reform reduced the tax rate for domestic companies. We find that this induced collectively-owned enterprises and domestically-owned private companies to reduce leverage, though again there was no significant response in stateowned enterprises. Our results also suggest that the 2008 reform reduced tax induced investment round-tripping through Hong Kong, Macao and Taiwan.

Clemens Fuest and Li Liu