Policy Consistency Matters: The Impact of Tax Incentive Expectations on Long-term Corporate Investment

【Authors】

LIU Jindong, WEI Yudan & XU Wenjun

【WorkUnit】

LIU Jindong, WEI Yudan （Shandong University of Finance and Economics, 250014）；XU Wenjun （Shandong University, 250100）

【Abstract】

In recent years, China has faced growing challenges in sustaining stable economic growth, due to not only insufficient aggregate demand but also weak societal expectations. The government has introduced a series of tax incentives to stimulate the economy. However, short-term preferential policies and extended preferential policies with durations of less than one year have been introduced in rapid succession, raising concerns about their potential negative impact on policy expectation stability and consequently, firms’ long-term investment decisions.
This paper examines the differentiated impacts of short-term versus long-term VAT refund policies arising from the intersection of two different tax regulations. Using data from listed companies, it assesses how these two VAT refund policy types influence long-term corporate investment. The following conclusions are drawn. First, long-term VAT refund policies significantly enhance firms’ long-term investment levels, while short-term VAT refund policies exhibit no significant impact. This result holds across multiple robustness tests. Second, mechanism analysis shows that compared with tax refunds to alleviate financing constraints, long-term VAT refund policies foster sustained preferential expectations, which boost corporate investment confidence. These policies significantly elevate firms’ risk tolerance, increase their willingness to take long-term liabilities, and strengthen long-term value orientation, thus promoting long-term investment decisions. Third, heterogeneity analysis shows that the impact of long-term VAT refund policies on corporate investment is more pronounced in mature enterprises and that the tax business environment also plays a moderating role: enterprises in regions with advanced digital tax administration and lower tax uncertainty exhibit greater responsiveness to long-term VAT refund policies. 
The research findings offer three inspirations for policymakers. First, it is necessary to further optimize the supply and declaration mode of tax preferential policies. We need to strengthen the sustainability of tax incentives, minimize the supply of short-term tax policies, and align tax incentives with firms’ long-term investment horizons to avoid wasteful tax expenditures. Second, the reform of “streamlining administration, delegating powers, and improving services” should be continued and deepened in the tax system, to improve policy effects and enhance enterprises’ access to tax benefits. Finally, by comprehensively promoting digital and intelligent tax administration, we can standardize tax services to make them more convenient and targeted, as well as tax law enforcement, and thus reduce tax uncertainties. Digital tax administration can effectively stimulate corporate investment and plays an important role in fostering an effective market with a proactive government.

JEL: E61, E62, D84

【KeyWords】

Expectation of Tax Incentives, Long-term Investments, Patient Capital