Capital-biased tax policy and the labour income share of enterprises

Can capital-biased tax policies improve income distribution? We use the accelerated depreciation policy (ADP) for fixed assets to examine its effect on income distribution. The empirical results show that the ADP significantly increases firms’ labour income share. Mechanism analysis indicates that an important channel is intensified product market competition: the policy weakens firms’ monopoly pricing power and alters firm entry and exit dynamics, which helps raise the labour income share. We also find evidence broadly consistent with a capital–labour complementarity channel, whereby the policy increases fixed-asset investment and may affect the labour income share through factor adjustment. However, the statistical support for this latter mechanism is more limited, and we treat it as suggestive. Heterogeneity analysis shows that the policy effect is more pronounced in highly competitive markets, highlighting the importance of a well-functioning competitive market environment for policy transmission. Additionally, the increase in labour income share is concentrated among non-managerial employees. The findings suggest that tax policies aimed at stimulating investment affect capital accumulation and play a positive role in improving income distribution.