Incentive

Labour economics

Financial capital

Microeconomics

Social psychology

Enforcement

Tax policy

Depreciation (economics)

Tax credit

China

Economics

Market economy

Tax reform

Business

Psychology

Politics

Political science

Monetary economics

Public economics

State income tax

Human capital

Compliance (psychology)

Capital formation

Deferred tax

Corporate tax

Tax avoidance

Investment (military)

Profit (economics)

Gross income

Journal of Economic Behavior & Organization

We evaluate the effects of a Chinese accelerated depreciation policy that occurred in 2014 on firm investment. We present three findings. First, on average, the policy increased firms’ investment in eligible capital, especially the purchase of equipment and machines. Second, the policy effects are stronger for larger firms, firms with more cash, and firms with better access to finance, which tend to be less financially constrained but have better tax compliance. Third, the effect magnitude increases with imputed county tax enforcement but decreases with provincial tax fraud rate. These results shed light on the importance of improving tax compliance in making tax incentives effective.

Tax Compliance and Investment Incentives: Firm Responses to Accelerated Depreciation in China