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Taxing the Productive and Misallocation across Firms -- Evidence from a Fiscal Squeeze Experiment in China
15:30-17:00, Friday, December 18, 2020
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Dr. Shawn (Xiaoguang) CHEN is Assistant Professor at the Business School of the University of Western Australia. He received his Ph.D. in Economics from London School of Economics and Political Sciences in 2015. His research interests include Taxation, and Development and Growth. His articles have been published in Journal of Public Economics, Economics Letters, and in leading Chinese journals including Zhongguo Shehui Kexue and Jingji Yanjiu.
We investigate how the cross-firm joint distribution of effective VAT rate (EVR), markup, and productivity affects the sectoral aggregate productivity via misallocation. We employ the abolition of agricultural tax in 2005 across China as a natural fiscal squeeze experiment that led to a lower variance of the EVR across manufacturing firms because of tougher tax enforcement on tax evaders. The Diff-in-Diff results show that the aggregate TFP increased in response to the decrease in dispersion of EVR and markup across firms. The magnitude of TFP gain are very close to the result from counter-factual analysis based on the standard structural model of misallocation with variable markup. The findings have rich implications on tax administration, tax reform, and misallocation.
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