Closing the Gaps : Foreign Direct Investment, Corporate Tax Unification, and Wage Inequality

We study the distributional effects of preferential tax policies for FDI using China’s corporate income tax unification reform as a natural experiment. We first present a simple model to motivate our empirical analysis. Using a differential exposure approach, we then show that eliminating preferential tax treatment reduces both between- and within-prefecture wage inequality in China. The wage effect is more pronounced for workers with more educational attainment, white-collar workers, or workers employed in the advanced service sectors. Finally, we provide evidence that the tax reform results in labor reallocation from foreign-owned firms to domestically-owned firms