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| Greening for Quality Enhancement: Green Tax Reform, Innovation Incentives, and Corporate Total Factor Productivity |
| Zhao Lexin Fang Hongsheng |
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Abstract Improving the green tax system is a key step in developing new quality productive forces according to local conditions. Implementing rigid constraints on water resources and comprehensively advancing the water resource fee-to-tax reform are inherent requirements and important practices in this process. This paper takes the water resource tax reform as a starting point to systematically examine the theoretical mechanism and policy effects of how the green tax system influences enterprises’ total factor productivity (TFP). The aim is to provide micro-level evidence for the role of the green tax system in promoting the development of new quality productive forces.
Based on the data from China’s listed companies (2010-2023) and Difference-in-Difference-in-Differences (DDD) model, this paper derives the following findings: First, the water resource tax reform significantly enhances enterprises’ TFP. Second, the underlying mechanisms of the reform’s effect operate at both direct and fundamental levels. The direct mechanism lies in significantly promoting corporate innovation, which encompasses both green innovation and other types of innovation. Moreover, green innovation is primarily manifested as source control-oriented innovation. The fundamental mechanism involves establishing a well?defined incentive structure that combines rewards and penalties: on one hand, by strengthening legal constraints, standardizing tax collection and management, and enhancing social supervision, the reform pressures enterprises to adapt to the new regulatory environment through innovation; on the other hand, by implementing differentiated tax rates and offering tax incentives under specific circumstances, the reform effectively stimulates enterprises’ intrinsic motivation to carry out water saving technological upgrades and innovation. Third, the water resource tax reform demonstrates a notable supply chain transmission effect. Reform shocks originating from both upstream and downstream industries effectively enhance the TFP of focal firms. Fourth, the positive impact of the reform on firms’ TFP is contingent on the quality of the regional business environment. The reform effect is more pronounced in regions with a better business environment, whereas in areas where the business environment is less developed, the effect remains relatively limited or even insignificant.
This paper’s incremental contributions are primarily reflected in the following three aspects: First, the study reveals the supply chain transmission effect of environmental regulation, expanding the scope of the Porter Hypothesis. It demonstrates that the impact of the water resource tax reform is not confined to individual firms but triggers systemic responses at the industrial chain level through input-output linkages. The discovery of this chain-reaction enhancement effect extends the research perspective from micro-level enterprises to the industrial ecosystem, serving as a meaningful supplement to the literature on the economic consequences of environmental regulation. Second, this study emphasizes, from the perspective of institutional complementarity, the importance of optimizing the business environment for fully realizing the effects of environmental regulation. Third, by constructing a dual-effect framework that integrates regulatory pressure and tax incentives, this study provides a new theoretical perspective for understanding the impact of environmental regulation on corporate productivity, clarifying the complementarity between constraint mechanisms and incentive policies.
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Published: 06 May 2026
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