The Political Dynamics of Corporate Tax Avoidance: The Chinese Experience

Abstract

In China's political selection system, officials capable of growing local economies are reward-ed with promotions. Eager to demonstrate economic achievements, newly appointed local lead-ers may raise tax revenues to expand fiscal expenditures on infrastructure projects. Against this backdrop, we study how political appointments influence local firms' tax planning. Based on a sample of locally administered state-owned enterprises (SOEs), we find firms decrease their tax avoidance after new leaders take office. The political-turnover effect on these firms' tax positions is more evident when the incoming leaders have more political clout over SOE managers, the incentives to divert resources are stronger, or politician-manager networks are present, and subsides following the launch of the anticorruption campaign. Furthermore, firms with higher post-turnover tax payments subsequently receive more government contracts or subsidies. Overall, our findings suggest political incentives shape the tax-planning activities of SOE managers in a "two-way favor exchange" manner.

The Unintended Consequence of Land Finance: Evidence from Corporate Tax Avoidance

“…For example, Liu et al (2015) find that local officials tend to tighten collection to generate immediate effects on fiscal revenue during the early part of their term. Chen et al (2021c) also find that career-minded local officials are inclined to collect more taxes to expand fiscal expenditure. 3 In this way, our paper is also related to the broad housing market and real estate finance literature (e.g., , Fu et al 2015, Agarwal et al 2016, and Wu et al 2016).…”

Environmental regulation and corporate tax avoidance—Evidence from China

“…The Control represents the control variables. Following previous research on tax evasion [ 23 ], we selected the following control variables: firm leverage ( Lev ), firm size ( Size ), fixed assets ratio ( NetFi ), intangible assets ratio ( NetIn ), return on assets ( Roa ), firm age ( Age ), the four major accounting firm supervisions ( Foac ), and the nature of the company’s property rights ( Soe ). In addition, the model adds a year fixed effect ( δ t ) to control the influence of certain nationwide changes that occur in a fixed year on corporate tax avoidance and corporate fixed effect ( γ i ) to control all possible impacts on corporate tax avoidance, whereas not changing corporate characteristics with time.…”

“…In model (1), TA is a dependent variable for measuring corporate tax avoidance. We use a tax avoidance index expressed as the difference between the actual and nominal tax rates [23]. Therefore, TA = ETR−TAX, where ETR is the actual income tax rate of the enterprise, using Porcano to divide the income tax expense by pre-tax earnings [24], the difference between the income tax expense and deferred income tax expense divided by the pre-tax earnings.…”

Endogenous cyclical corporate tax burden in China: The role of tax quotas and growth targets

“…As a special factor in China's economic transition (Feng & Shen, 2015), tax quota is a planned growth rate of tax revenue for local governments. The completion of the tax quotas directly determines the promotion and material rewards of tax officials (Chen et al., 2015). Zheng (2005) and Ma (2009) believe that accessing the performance of taxation administrations by completing tax quotas may exacerbate local governments' blind pursuit of tax revenues, which transforms tax quotas from projected goals into mandatory planned political tasks.…”