How do tax reductions motivate technological innovation?

       The main approach to promoting high-quality development lies in fostering self-reliance and self-improvement in science and technology, as well as enhancing the technological innovation capabilities of enterprises. In the new stage of moving from imitation to innovation, tax reduction plays an important role in promoting enterprise technological innovation. This article uses the data of A-share listed companies from 2008 to 2019 to explore the mechanism of how tax reduction exerts its core role in innovation. The findings indicate that tax cuts have a stimulating effect on firms’ research and development (R&D) innovation.
       These results hold true even after accounting for tax evasion and R&D manipulation behaviors. The mechanism analysis reveals that the incentive effects of tax cuts are realized through financing, specialized divisions, and the creation of added value. Notably, the “financing effect” exhibits a path dependence among high-tech enterprises. Furthermore, in terms of tax preferential policies, the “R&D expenses plus deduction” policy demonstrates the most significant incentive effect, while the “15% tax rate preference” is less effective than initially anticipated. However, thecombined effect of both policy types proves to be significant in promoting R&D innovation, thereby enhancing the impact of a single-policyapproach. Nevertheless, a structural phenomenon regarding the incentive effect on the input and output sides is observed. Through 
empirical analysis, this paper not only presents fresh ideas for improving tax reduction policies and unleashing the potential of scientific and technological innovation, but also offers essential insights for facilitating technological catchup and achieving high-quality economic development.1 Economics and Management School, Wuhan University, Wuhan 430072, China.2 Research Center of Yangtze River Economic Belt Development, WuhanUniversity, Wuhan 430072, China. ✉email: gqyangere@126.com; hswang@whu.edu.cn