Do green tax incentives promote corporate pollution reduction in China?

Abstract

In recent years, against the background of increasing economic downward pressure, China's environmental regulations have faced the challenge of internalizing environmental costs intertwined with business pressure. This paper attempts to construct a multi-temporal double-difference model based on the basic principles and analytical logic of microeconomics. It uses China's value-added tax (VAT) transition reforms as a natural experiment to identify the causal effect of tax incentives on firms' pollution emissions to find that VAT transition reforms can significantly reduce firms' pollution emissions. The findings suggest that green tax incentives can promote corporate pollution emission reduction and provide policy recommendations for “greening" of China's tax system.