Department of Economics
Institutional Affiliation: Duke University
NBER Working Papers and Publications
|October 2019||Tax Policy and Lumpy Investment Behavior: Evidence from China's VAT Reform|
with Zhao Chen, Zhikuo Liu, Juan Carlos Suárez Serrato, Daniel Xu: w26336
We incorporate the lumpy nature of firm-level investment into the study of how tax policy affects investment behavior. We show that tax policies can directly impact the lumpiness of investment. Extensive-margin responses to tax policy are key to understanding the effects of different tax reforms and to designing effective stimulus policies. We illustrate these results by studying China's 2009 VAT reform, which lowered the tax cost of investment and reduced partial irreversibility|the price gap between new and used capital. Using administrative tax data and a difference-in-differences design, we estimate a 36% investment increase. This effect is driven by investment spikes, which is consistent with the reduction of VAT-induced partial irreversibility. Using a dynamic investment model that f...