Wednesday, Dec 12, 2018     | 2:00pm-3:30pm | Room 333, HSBC Business School Building

Abstract

The replacement of gross receipt tax （GRT） with value added tax （VAT） is an important phenomenon in the past half century. The conventional theory predicts that this kind of tax reform can reduce vertical integration, raise production efficiency, and potentially improve industrial structure. Yet there is surprisingly little empirical evidence for these predictions. This paper exploits the tax reform that replaced the GRT with VAT for service industry in China and apply difference-in-difference framework to estimate the causal effect of this GRT-to-VAT tax reform. We find evidence consistent with the theoretical predictions. First, the tax reform increases the probability and the intensity of outsourcing for both manufacturing firms and service firms. The increase is larger for the industries relying on the treated service industry more heavily in production. Second, the reform increased total factor productivity of the manufacturing firms. Third, the tax reform boosted the sales of the service industry and changed the industrial structure by promoting the growth of service industry.