Revenue-sharing reform and corporate investment: evidence from China’s “five-to-five” sharing reform of value-added tax

This paper takes China’s 2016 reform of the Value-Added Tax (VAT) revenue-sharing arrangement between the central and local governments as the research context and investigates the impact of an increased local share in VAT revenue. Using A-share listed firms from 2011 to 2024 as the sample, the study finds that the reform significantly increased corporate investment, with more pronounced effects among under-investing firms. This reflects the government’s selectivity in cultivating the tax base. The mechanisms operate in two ways. On the one hand, the reform enhanced firms’ willingness to invest by encouraging local governments to assume more administrative responsibilities and improve the business environment. On the other hand, it strengthened firms’ investment capacity through financial support. Both mechanisms show stronger effects in under-investing firms. Further analysis reveals three key findings. First, in regions with low fiscal self-sufficiency, the fiscal incentive effect of the reform is more significant, highlighting the necessity of increased local revenue for proactive governance. Second, the investment-promoting effect mainly applies to private firms and local state-owned enterprises, but not to central state-owned enterprises, indicating an alignment between local tax interests and investment promotion. Third, after the reform, the positive effect of investment on firm value becomes significantly stronger, suggesting improved investment efficiency. This study contributes to the literature by uncovering the micro-level mechanisms of fiscal incentives and provides empirical support for fiscal decentralization theory. It also highlights the critical role of local government initiative and offers implications for optimizing fiscal policy design, guiding effective investment, improving the business environment, and building a coordinated system of effective markets and enabling government.