This paper explores whether tax policy can affect corporate innovation. Specifically, based on the data of Shanghai-Shenzhen A-share listed companies from 2014 to 2019, this paper tests the effects of China’s VAT rate adjustment on corporate innovation by using a quasi-natural experiment design and the time-varying DID approach. The results show that the VAT rate adjustment significantly promotes corporate innovation. The further study shows that the positive relationship between the VAT rate adjustment and corporate innovation is concentrated in firms facing greater difficulties in transferring tax burden and acquiring external financing. The mechanism analysis shows that the VAT rate adjustment promotes corporate innovation by increasing firm’s internal cash flow and debt financing, which are consistent with the theoretical predictions. Finally, we find that the VAT rate adjustment significantly improves corporate innovation efficiency. This paper contributes to the extant research on the effects of tax policy and the growing literature on the determinants of corporate innovation.