Corporate Income Tax Reform, State Ownership And Firm's Labor Demand

Among the exogenous employment policies, corporate tax policy as one of the most important national fiscal policies is a typical tool to realize employment. Western studies show that corporate tax rate and "Employment Tax Credit" are two important factors of labor demand. The corporate tax reform in2007uniformed the corporate tax rate between domestic and foreign-funded firms, besides it also largely changed the "Employment Tax Credit". This reform provides us with a good chance to study the relationship between corporate tax and labor demand based on an exogenous policy change.Did the change in corporate income tax and "Employment Tax Credit" change the firm's labor demand as the western studies expected? Most listed firms in China are state-controlled.Previous research has shown that the government interference due to state-controlled ownership may affect the behavioral decision of state-controlled firms.Did the special system background have effect on the relationship between corporate income tax and firm's labor demand?After analyzing and sorting out the related researches and policies, we selected669A-share listed firms and firstly tested whether the theory about the relationship between corporate tax and labor demand apply in China based on the corporate income tax reform in2007.Furthermore, we tested whether different ownership nature affects the relationship between corporate tax and labor demand. The results suggest:The change in corporate tax rate had no significant effect on firm's labor demand after the tax reform; the change in "Employment Tax Credit" improved firm's labor demand.Considering the effect of state ownership, both the reduction in corporate tax rate and the increase in "Employment Tax Credit" significantly improved the firm's labor demand; the effect of the change in tax law of state-controlled firms was significantly lower than non-state-controlled firms. Further research suggests that the change in corporate income tax rate and "Employment Tax Credit" had significant effect on firm's labor demand only in non-state-controlled firms, which indicates that state-owned firms are less insensitive to tax policy change.Based on corporate tax rate, this paper tested the effect of exogenous change in corporate tax on labor demand in firm level, filling related academic gap in China. Considering the special system background in China, this paper further reveals the effect of state ownership on the decision making of firm's labor demand, which enriches the related international literature. Besides, this paper tested the effects of corporate tax reform on improvements of social welfare, which has policy implication for employment policy making in China and other developing countries.