How Tax Reform from Switching GRT to VAT Affect Firmsí» Outsourcing Behavior and Production Efficiency: Evidence from China


 Topic:How Tax Reform from Switching GRT to VAT Affect Firms’ Outsourcing Behavior 

     and Production Efficiency: Evidence from China

Speaker:Li Yan Tsinghua University, Doctor of Economics


Time:March 29 2018,10:30am

Abstract:Theory suggests that gross receipt tax (GRT) incentivizes firms to 

vertically integrate and thus distorts production efficiency.Yet there has 

been surprisingly little empirical evidence for the effect of GRT on firms’ 

production boundary. In this paper, we examine how Chinese tax reform that 

switched from GRT to VAT affected firms’ outsourcing behavior and production 

efficiency. Using administrative data on firms tax payment from 2009 to 2015, 

we find that GRTVAT reform increases outsourcing probability by up to 11.08 

percent for every 1 percent increase in exposure for manufacturing firms and 

5.8 percent for affected service firms comparing to unaffected service firms, 

and boosts the share of outsourcing out of sales amount by up to 0.26 percent 

for every 1 percent increase in exposure for manufacturing firms and 2.2 percent 

for affected service firms comparing to unaffected service firms respectively.

Furthermore, we find that manufacturing firms with higher exposure to the reform 

show a greater increase in total factor productivity (TFP) comparing to lower 

exposure manufacturing firms. These results suggest that the reform of switching 

GRT to VAT encourages specialization and improves production efficiency.

Introduction to the speaker:Li Yan  is a Ph.D. student at the School of Economics and Management of Tsinghua University.Her research interests are public economics and international trade.Her dissertation has been published in many well-known domestic economic magazines.