Lin Zhifan;Liu Shiyuan;
This paper studies the infl uence of tax burden on manufacturing fi rm's innovation. By matching city-level value-added tax data and corporate income tax data with the fi rm-level data of the World Bank Chinese Enterprise Survey 2012 and using instrumental variable to correct the measurement error in tax burden data, we find that: tax burden has negative effects on the extensive and intensive margins of firm innovation as well as most specific forms. Subsample regressions show that the negative effects are severer for small and medium size firms, non-exporting firms, and private firms. We also find that value-added tax is more distortionary than corporate income tax. This indicates that the tax system reform which aims at gradually increasing the proportion of direct taxes will alleviate the negative effects of tax burden on firm innovation.