Tax reduction, technological progress, and energy efficiency improvement: A quasi-natural experiment from China

Tax reduction is an important way for governments to conduct macroeconomic reg-ulation and may improve energy efficiency by incentivizing technological progress in firms. Based on the exogenous impact of VAT reform in China, this study constructs a difference-in-differences model using industrial firms, pollution and patent data to investigate the impact and mechanism of tax reduction on firms' energy efficiency. The empirical results show that: (1) Tax reduction can significantly improve the firms' energy efficiency by 6.3%, and this effect is increasing over time. (2) Mechanistic analysis shows that capital renewal, energy use restructuring and technological innovation are important ways for enterprises to improve energy efficiency. (3) Firm-level heterogene-ity analysis shows that tax reduction has a stronger energy efficiency improvement effect on firms with low financing costs, high market share, and receiving government subsidies. Regional heterogeneity analysis shows that firms located in regions with high marketization and low tax effort are more likely to benefit from tax reduction. This study provides theoretical and empirical support for energy efficiency improvements achieved by tax reduction, and provides an important reference for the optimal design of tax reduction policies. (c) 2023 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights reserved.