Export tax rebate and the margins of exports: product-level evidence from a quasi-natural experiment
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Export tax rebate and the margins of exports: product‑level evidence from a quasi‑natural experiment Wonkyung Lee1 · Hong Ma1 · Yuan Xu1 Accepted: 29 September 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper examines the effect of export value-added tax (VAT) rebate policy on the margins of exports in terms of export value, quantity and price. Treating the VAT rebate adjustment implemented in July 2007 as a quasi-natural experiment, we find that a reduction in the export VAT rebate rate has significantly reduced export value and quantity with an incomplete pass-through to export price. The estimated responses to the rebate are generally higher than those to exchange rate fluctuations and comparable to those to tariff changes. Keywords VAT rebate · Export margins · China JEL classification F13 · F14
1 Introduction China’s export growth over the past decades has been addressed in numerous discussions (e.g. Rodrik 2006; Bai et al. 2017). Many observers attribute the growth to China’s export-promoting policy instruments. Export VAT rebate is one such instrument (Chandra and Long 2013; Gourdon et al. 2017). A VAT is a tax on firms on the
* Yuan Xu [email protected] Wonkyung Lee [email protected] Hong Ma [email protected] 1
School of Economics and Management, Tsinghua University, Beijing 100084, China
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difference between its total value of sales and of purchases of inputs. To encourage exports and avoid double taxation, China started to refund VAT for exports since 1985. Though it was initially designed for zero export taxation,1 the Chinese government has undertaken several major reforms with different VAT rebate rates on different targeted products. The export VAT rebates have been frequently adjusted as an instrument to promote or discourage exports of certain products. One major reform occurred on 19 June 2007, when Chinese government announced a profound reduction and revocation of the VAT rebate rate on various export products.2 According to the announcement (also known as Circular 90), effective from 1 July 2007, three types of changes are applied to a wide range of products. The first is to cancel the rebate of 553 “high energy-consuming, heavy pollution or resource-oriented” products. The second is to reduce the rebate rates of 2268 products that tend to cause trade friction with China’s trade partners. The third is to exempt the VAT on export sales for 10 products. The motivation behind the policy was to ease the tension with major trade partners with which China has accumulated rising trade surplus. The notice was announced just a few days before its enforcement and was largely unexpected. This paper empirically examines the effect of this large round of VAT rebate adjustment on China’s exports, not only on export value, but also on export quantity and price, using the most detailed monthly export data at the eight-digit HS product level. We focus exclusively on the second type change: redu
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