Tax Reduction Policies and Corporate Financial Performance: Evidence from Chinese SMEs
Keywords:
tax cuts, corporate financial performance, small and medium-sized enterprises (SMEs)Abstract
This study evaluates whether tax reduction policies improve the financial performance of Chinese small and medium-sized enterprises (SMEs) through an innovation (R & D) channel. Using firm-level data for N = 300 SMEs, we operationalize policy exposure as the reduction in a firm’s effective tax burden and estimate its association with innovation input and profitability using multiple-regression models with control variables (firm size, profitability, financing constraints, and industry characteristics). Descriptive evidence indicates that average R & D investment increases from 1.8 to 2.1 million RMB in the policy year (+16.67%) and further to 2.3 million RMB one year later (+9.52%), while net profit margin rises from 6.0% to 6.5% (about + 0.5 percentage points). Correlation results show a positive relationship between tax reductions and R & D intensity (r = 0.35). Multiple regressions further confirm a positive and statistically significant effect of tax cuts on R & D intensity (β= 0.045, which remains stable after adding controls (β= 0.040). Heterogeneity analyses suggest stronger effects in manufacturing and information technology services and among smaller firms, consistent with tighter pre-policy financing constraints and higher marginal returns to internal funds. Overall, the findings support the view that tax relief can strengthen SMEs’ innovation investment and, with a lag, contribute to improved financial outcomes, highlighting the value of targeted and monitorable tax incentives that encourage the reinvestment of tax savings into R & D.
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