Taxation and Sustainability: How does Green Innovation influence the impact of taxation on Firm performance in China and the U.S

Abstract

This study examines the impact of corporate taxation on financial performance, with a focus on the moderating role of green innovation. Using panel data from 35 U.S. and 25 Chinese listed technology companies between 2010 and 2022, econometric models are employed to capture both direct and interaction effects, with robustness checks ensuring reliability. Findings indicate that high tax rates constrain firms’ financial performance by limiting resources available for strategic investment, including sustainability initiatives. In the United States, tax incentives such as credits mitigate these effects, supporting green innovation and improving firms’ ability to balance fiscal pressure with long-term growth. In contrast, Chinese firms benefit from green innovation in the long run, but the high upfront costs combined with less developed fiscal support systems intensify short-term financial pressures. These results highlight the crucial role of tax policy design in encouraging sustainable business practices without undermining competitiveness. Incentive-based fiscal measures can foster green innovation, strengthen firm performance, and contribute to a more sustainable economic model. The comparative U.S.–China perspective represents an important contribution of this research, while the inclusion of robustness tests, particularly during the COVID-19 period, enhances the empirical validity of the findings across different contexts.