Public economics

Welfare

Economics

Income tax

Notching

Political science

Metallurgy

China

Materials science

Investment (military)

Market economy

Monetary economics

Politics

American Economic Review

We study a Chinese policy that awards substantial tax cuts to firms with R&amp;D investment over a threshold or “notch.” Quasi-experimental variation and administrative tax data show a significant increase in reported R&amp;D that is partly driven by firms relabeling expenses as R&amp;D. Structural estimates show relabeling accounts for 24.2 percent of reported R&amp;D and that doubling R&amp;D would increase productivity by 9 percent. Policy simulations show that firm selection and relabeling determine the cost-effectiveness of stimulating R&amp;D, that notch-based policies are more effective than tax credits when relabeling is prevalent, and that modest spillovers justify the program from a welfare perspective. (JEL D22, D24, H25, O14, O32, P31, P35)

Notching R&amp;D Investment with Corporate Income Tax Cuts in China

Notching R&amp;D Investment with Corporate Income Tax Cuts in China

Notching R&D Investment with Corporate Income Tax Cuts in China