The Political Dynamics of Corporate Tax Avoidance: The Chinese Experience

52 Pages Posted: 6 Aug 2015 Last revised: 17 Nov 2020

See all articles by Hanwen Chen

Hanwen Chen

University of International Business and Economics

Song Tang

Shanghai University of Finance and Economics - School of Accountancy; Shanghai University of Finance and Economics - Institute of Accounting and Finance

Donghui Wu

The Chinese University of Hong Kong; Center for Institutions and Governance

Daoguang Yang

University of International Business and Economics (UIBE)-Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 2015

Abstract

One institutional feature behind China’s spectacular economic growth is its political selection system, which it uses to promote officials who are capable of growing local economies. Against this backdrop, we examine how political turnovers cyclically influence firms’ tax avoidance behavior. Consistent with the prediction that newly appointed local leaders tend to collect more taxes to expand fiscal expenditures and boost local economies, we find that state-owned enterprises (SOEs) decrease their tax avoidance behavior after new leaders take office. However, this finding does not hold for non-SOEs. Our analyses also reveal that the political turnover effect on SOEs’ tax positions is stronger when the incoming leaders have more political clout to command favors from SOEs, managers’ incentives to divert resources are stronger, or politician-manager networks are more likely to work. Furthermore, SOEs that undertake less aggressive tax positions following turnovers receive more government subsidies in the future. Overall, our findings suggest that political incentives shape the tax planning activities of local SOEs in a “two-way favor exchange” manner.

Keywords: Political cycle, Tax avoidance, Agency problem

JEL Classification: H26, E32, P26, G30

Suggested Citation

Chen, Hanwen and Tang, Song and Wu, Donghui and Yang, Daoguang, The Political Dynamics of Corporate Tax Avoidance: The Chinese Experience (September 2015). Available at SSRN: https://ssrn.com/abstract=2640111 or http://dx.doi.org/10.2139/ssrn.2640111

Hanwen Chen

University of International Business and Economics ( email )

10# Huixin East Street,Chaoyang District
Beijing, Beijing 100029
China

Song Tang

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China
86-21-6590 4842 (Phone)

Shanghai University of Finance and Economics - Institute of Accounting and Finance ( email )

Shanghai, 200433
China
86-21-6590 4842 (Phone)

Donghui Wu (Contact Author)

The Chinese University of Hong Kong ( email )

Sha Tin
N.T.
Hong Kong
852-3943 7836 (Phone)
852-2603 5114 (Fax)

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/wu-donghui/

Center for Institutions and Governance ( email )

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Cheng Yu Tung Building, No. 12 Chak Cheung Street
Hong Kong
China

HOME PAGE: http://www.bschool.cuhk.edu.hk/centres/centre-for-institutions-and-governance/

Daoguang Yang

University of International Business and Economics (UIBE)-Business School ( email )

#10 Huixindong St.
Chaoyang District
Beijing, 100029
China

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