Local Taxation and Firm Employment: Evidence from Chinese Listed Companies∗

This paper examines the effects of province corporate income tax policies on firm employment. It uses A-share listed Chinese firms’ panel data for 2004 to 2014. To control for unobservable time-varying province characteristics, we employ a quadratic function of time to approximate the effect of time-varying province heterogeneity. We also construct an instrumental variable to deal with the potential endogeneity problem. The empirical results in this paper show that there is a statistically significant negative effect of the local corporate income tax rate on the number of employees, which means that increasing the local tax rate results in reduced labor input of firms. In addition, the results in this paper suggest that Chinese central government should reform the supervision and management of regional tax preferential policies, and address existing unreasonable tax incentives.