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<p>This study investigates the effects of informal place-based tax incentives on firms in China using firm-level tax data from 2008 to 2016. We find that firms benefiting from such incentives through land purchases experience a decline in formal tax costs but an increase in informal tax costs. We further document sectoral asymmetry in this tax substitution: manufacturing firms benefit from the reduction in formal taxes, whereas firms in other sectors face increased informal tax burdens. Additionally, firms experience an unintended decline in total factor productivity, driven by diversification into activities that defy their comparative advantage and by rising costs associated with informal taxation. These findings suggest that place-based policies, while reducing tax costs, may generate inefficiencies.</p>

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Nothing comes for free: the impact of place-based tax incentives on firms’ costs

  • 期刊论文

  • 发表日期：

    2026年3月5日

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  • Siyuan Cai,
  • Shunfeng Song,
  • Jiating Wang,
  • Fanglin Chen

摘要

This study investigates the effects of informal place-based tax incentives on firms in China using firm-level tax data from 2008 to 2016. We find that firms benefiting from such incentives through land purchases experience a decline in formal tax costs but an increase in informal tax costs. We further document sectoral asymmetry in this tax substitution: manufacturing firms benefit from the reduction in formal taxes, whereas firms in other sectors face increased informal tax burdens. Additionally, firms experience an unintended decline in total factor productivity, driven by diversification into activities that defy their comparative advantage and by rising costs associated with informal taxation. These findings suggest that place-based policies, while reducing tax costs, may generate inefficiencies.