The influence of environmental protection tax law on total factor productivity: Evidence from listed firms in China

The Environmental Protection Tax Law (EPTL) is one of the major environmental policies announced by Chinese authorities in recent years. It aims to push corporate firms to boost their production efficiency, reduce pollutant emissions, and promote sustainable growth nationwide. Nonetheless, its impact on firms' total factor productivity (TFP) has yet to be studied. Therefore, we adopt a difference-in-differences approach to explore whether this policy improves firms' TFP, based on a sample of all A-shares from 2015 to 2020. We divide sample firms into heavy polluters and others and demonstrate that the EPTL promotes heavy polluters' TFP. This empirical result holds after various robustness tests. We also conduct a series of additional tests to explore how this policy affect firms' TFP under different situations: a) the dynamic effect analysis shows that the EPTL's TFP-promoting effect will increase over time; b) the quantile analysis reveals that the EPTL has a stronger promoting effect on firms with lower rather than higher TFP levels; c) the threshold effect analysis shows that the TFP-promoting effect of the EPTL increases exponentially after threshold values for research and development investment, government subsidies, and firm profitability are exceeded; and d) the difference-in-differences-in-differences approaches reveal that the EPTL has a worse impact on firms with political connections and those located in provinces where EPTL tax rates increased relative to those in preceding legislation. These findings suggest that the Chinese government should adhere to implementing this policy in the long term and encourage firms to increase their research and development investments. In addition, it should provide special aid to mitigate the EPTL's negative impact on politically connected firms and firms located in province where tax rates increased.