VAT rebates and export performance in China: Firm-level evidence

•Theory suggests value-added tax with incomplete export rebate act as export tax.•We study the impact of VAT rebates on Chinese exports using firm-level panel data.•We find robust evidence that VAT rebates increased Chinese firm's exports.•Each additional $1 spent on VAT rebates increased Chinese exports by $4.7.

A destination-based VAT system without a complete export tax rebate is detrimental to a country's exports, while an increase in the VAT rebate rate helps reduce the negative effects. In this paper, we study the role of VAT rebates in affecting Chinese exports using firm-level panel data for 2000–2006. To address potential endogeneity, we rely on a quasi-natural policy experiment in 2004, when the fiscal conditions of local governments became important in determining the actual VAT rebate rates for exports. The empirical findings demonstrate significant and large effects of VAT rebates on export volume. On average, for each percentage point increase in the VAT rebate rate, the amount of exports increased by 13%, which translates into an additional $4.70 of exports for each $1 of export tax rebates paid.