Tax credits for employee education expenses and firm-specific human capital accumulation: Evidence from China

Abstract

This paper investigates the effects of tax credits for employee education expenses (TCEEE) on firm-specific human capital accumulation (HCA) by exploiting the implementation of the policy of an increase in the pre-tax deduction ratio for employee education expenses in China as a quasi-natural experiment. Our findings indicate that TCEEE policy effectively promotes firm-specific HCA, as evidenced by an increase in highly educated and skilled employees. Mechanism analysis reveals that the TCEEE policy improves firm-specific HCA by increasing employee education expenses and alleviating liquidity constraints. Heterogeneity analysis demonstrates that the effect of the TCEEE policy on firm-specific HCA is more pronounced in firms with heavier tax burdens, tighter financing constraints, and lower labor adjustment costs. Further analysis shows that the TCEEE policy promotes labor productivity, operating performance, and innovation output. Our findings suggest that tax incentives for human capital investment can effectively support firm-specific HCA.