Does Tax Sharing Matter for Export Quality Upgrading? Evidence from China

Abstract

Tax policy is critical for business operations and export decisions. However, the relationship between tax sharing and export has been less frequently discussed. This paper explicitly examines the underexplored tax-sharing system’s effect on manufacturing exporters’ export quality and develops four hypotheses. We use data on Chinese manufacturing exporters and prefecture-level tax-sharing from 2008 to 2013 and employ an instrumental variable approach to alleviate the endogeneity problem. The empirical evidence supports our hypotheses. We find that an increase in the prefecture-level government tax-sharing ratio significantly reduces export product quality of firms. This quality effect can occur through channels, including tax burden effect, production scale effect, and innovation effect. Moreover, more productive firms and those operated in cities with stronger intellectual property protection can face a smaller quality-reducing effect. Our findings offer policy implications for improving China’s modernized tax system and trade upgrading. Policymakers should recalibrate the tax-sharing system to reduce the tax burden on manufacturing exporters, particularly for innovative and high-productivity firms, and bolster intellectual property rights to enhance export quality and support China’s trade and economic modernization.