Collusion and corporate tax burden: Firm‐level evidence from China

Abstract

Government‐firm collusion and corporate tax avoidance will result in tax loss, which has spawned several challenges that hinder economic growth and political stability. Based on the microdata of the National Tax Statistics Database (NTSD) of China from 2010 to 2014, this paper estimates the impact of government‐firm collusion on corporate tax burden. Using the business entertainment expenses as a measure of collusion, we find that government‐firm collusion significantly reduces corporate tax burden and increases tax avoidance. Mechanism analysis shows that collusion reduces corporate tax burden by providing firms with preferential tax policies and weakening taxation supervision of tax authorities. In addition, we find that reaping enormous benefits is the primary motivation for government‐firm collusion. The reduction effect of collusion on tax burden will be more substantial if the parties involved can reap more benefits. If tax collectors' discretionary power is restricted, the mutual benefits will be reduced, thus making it difficult for tax officials and taxpayers to build collusive relationships.