BREAKING THE TAX CHAIN: CHINA’S VALUE-ADDED TAX REFORM AND THE RISE OF CAPITAL DEEPENING

Abstract

Reducing cascading taxation is a global priority for improving tax efficiency and supporting sustainable growth. China’s nationwide transition from business tax (BT) to value-added tax (VAT), initiated in 2012 and implemented gradually across sectors and regions, represents a landmark reform of its indirect tax system. This study examines the impact of the BT-to-VAT reform on firms’ capital deepening using panel data on A-share listed companies from 2007 to 2021. Using a staggered difference-in-differences (DID) approach, we identify the causal effects of the reform on firms’ investment behavior. The results show that the shift from BT to VAT significantly increases capital intensity, with stronger effects among state-owned enterprises, large firms, and highly competitive industries. Mechanism analysis indicates that the reform reduces effective tax burdens and strengthens incentives for fixed-asset investment, thereby promoting capital accumulation and long-term capital deepening.