Assessing the Fiscal Costs of Job Creation in China
LI Ming, ZHANG Xuanxuan, ZHENG Liming
School of International Trade and Economics, University of International Business and Economics; School of Public Finance and Taxation, Capital University of Economics and Business; Economics & Technology Research Institute, China National Petroleum Corporation
Summary:
This paper explores whether the current fiscal inputs are working as they should and if the policy implementation costs are too large (i.e., the input economics). In exploring these issues, one of the key tasks is to assess the fiscal cost of creating jobs under the current labor market conditions. This paper assesses the feasibility of fiscal policies by analyzing the input economics. To assess the fiscal cost of job creation in China and evaluate the role of fiscal policy in promoting employment in China, this paper uses the Accelerated Depreciation of Fixed Assets Policy for empirical analysis. This policy was issued because the slowdown of investment growth in the manufacturing industry after 2014 hindered firms' transformation and upgrades. This slowdown also impeded a development goal, that is, to accelerate the transformation of economic development patterns and speed up the construction of an innovative country, which was issued by the Third Plenary Session of the 18th Central Committee of the Communist Party of China in 2013. This fiscal policy specifies that enterprises' new fixed assets in six industries can adopt an accelerated depreciation method after January 1, 2014. These six industries comprise biopharmaceutical manufacturing; specialized equipment manufacturing; manufacturing railway, vessel, aerospace, and other transportation equipment; manufacturing computers, communication equipment, and other electronic equipment; manufacturing instruments and meters; and information transmission, software, and information technology services. Specifically, the newly acquired instruments and equipment for all enterprises in the above six industries after January 1, 2014 (including self-built materials), with a unit value not exceeding 1 million yuan, allowing a one-time charge to current costs and expenses, deducted in the calculation of taxable income, no longer divided into years to calculate depreciation are considered. The unit price of these newly acquired instruments and equipment with a value of more than 1 million yuan can be depreciated over a shorter period or by using an accelerated depreciation method. If a shorter depreciation period method is applied, the minimum depreciation period cannot be less than 60% of the minimum depreciation period as prescribed in the Corporate Income Tax Law. If an accelerated depreciation method is applied, the double-declining balance or sum-of-years-digits depreciation methods can be used. Using the quasi-natural experiment of the Accelerated Depreciation Policy, this paper uses 2010-2016 panel data from about 285 prefecture-level cities and the difference-in-differences method to assess the impact of tax cuts on employment and calculate the fiscal costs required to create new jobs. This paper finds that tax cuts generally increase employment. Regions that experienced hard economic shocks before the implementation of the policy experienced significant employment growth, suggesting that the policy could stabilize and expand employment. Using regression results, this paper calculates the policy cost and the number of jobs created by the policy in our preferred situation. The findings show that an employment multiplier for taxes is about 3.56; that is, for every 100,000 yuan in tax cuts, about 3.56 jobs are created, which is equal to a “cost per job” of 28,100 yuan (at 2014 prices). This result accounts for about 60% of the average wage level in 2014. Although this cost is generally lower than that in developed countries, it is not small considering China's national conditions. In the short term, fiscal policies can be used to increase economic growth and employment. However, it is necessary to make an overall plan for using funds, implementing performance evaluations, and preparing for future policy adjustments. This paper makes the following contributions to the literature. First, this is one of the first papers to adopt a standardized, rigorous approach to assess the fiscal cost of job creation in China, which is rich in theoretical and applied value. While existing studies focus on examining the significance of the employment effects of fiscal policies in China statistically, this paper further assesses the fiscal cost of individual job creation. On the one hand, this provides theoretical support for China to continue to stabilize and expand employment through fiscal policies. On the other hand, fiscal expenditure standards are the basis for fiscal budgeting and the cost calculation in this paper also provides references for employment-related policies and project budgeting. Second, this paper uses macro data to examine the employment effects of fiscal policy, which overcoming some limitations of micro-firm samples. The results show major improvements in two aspects: most micro-firm databases mainly include large firms and the findings cannot be easily extrapolated to the whole market players, and studies based on micro-firm samples mainly focus on the effects of policies on incumbents, which cannot capture the changes in firms entries or exits at the extensive margin and ignores the spillover effects due to industry and supply chain linkages. Using macro data at the regional level, this paper improves the reliability and external validity of the findings in the literature.
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