Chen, Zhao. <br/><br/>
Notching R&D Investment with Corporate Income Tax Cuts in China / 
Zhao Chen, Zhikuo Liu, Juan Carlos Suárez Serrato, Daniel Yi Xu. 
 - Cambridge, Mass.  National Bureau of Economic Research  2018. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w24749 .
 - Working Paper Series (National Bureau of Economic Research)  no. w24749. .
<br/><br/> June 2018. 
<br/><br/> We study a Chinese policy that awards substantial tax cuts to firms with R&D investment over a threshold or "notch." Quasi-experimental variation and administrative tax data show a significant increase in reported R&D that is partly driven by firms relabeling expenses as R&D. Structural estimates show relabeling accounts for 24.2% of reported R&D and that productivity increases by 9% when real R&D doubles. Policy simulations show firm selection and relabeling determine the cost-effectiveness of stimulating R&D, that notch-based policies are more effective than tax credits when relabeling is prevalent, and that modest spillovers justify the program from a welfare perspective. 
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