The Impact of China’s Environmental Protection Tax on Resource Allocation Efficiency

Abstract Understanding the efficacy of environmental protection taxes in optimizing resource allocation efficiency is crucial, yet limited empirical evidence exists on this topic. Based on a sample of Chinese listed manufacturing companies spanning the 2012–2021 period, this study employs a difference-in-differences approach to rigorously evaluate the nuanced impact of environmental protection taxes on resource allocation efficiency in the Chinese context. Our findings underscore that environmental protection taxes serve as catalysts for improved resource allocation efficiency, orchestrating factor flows towards high-productivity enterprises and simultaneously amplifying their market shares. Furthermore, these fiscal instruments play a pivotal role in ameliorating credit resource distortions vis-à-vis heavily polluting industries, thereby curbing instances of capital misallocation. And the disparity in actual tax rates among enterprises decreased. The influence of environmental protection taxes on resource allocation is particularly pronounced in sectors characterized by heightened pollution levels. Finally, the robustness of tax administration capabilities, and mitigating collusion between governmental and corporate entities are instrumental factors in safeguarding the resource allocation efficacy of environmental protection taxes.