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AbstractInnovation is crucial for technological progress and economic development. Using the value‐added tax (VAT) reform in China as a policy shock, this study explores whether tax incentives are beneficial in promoting corporate innovation. We find that the VAT reform has a significant positive impact on corporate innovation, and the finding holds under a series of robustness checks. Mechanism analysis suggests that the VAT reform promotes firms' innovation activities mainly by alleviating financing constraints and amplifying research and development intensity. This study offers policy implications for using tax policies to stimulate corporate innovation.