The Political Economy of Corporate Tax Avoidance

56 Pages Posted: 1 Jan 2016

See all articles by Qiao Liu

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Wei Luo

Peking University - Guanghua School of Management

Pingui Rao

Jinan University - Management School

Date Written: December 30, 2015

Abstract

We exploit exogenous variation in turnovers of China’s municipal political leaders to study how political incentives affect firms’ strategic tax avoidance behavior. We document robust cycles in corporate tax compliance corresponding with the timing of political turnovers. Specifically, we find that firms avoid less tax in the early period of local politicians’ terms, but more in the remaining terms. The magnitude of the political cycles varies across municipal city, politician, and firm characteristics. Entirely different from channels such as the political uncertainty, the political connection, and the potential collusions between local politicians and firm in their jurisdictions, our further analyses suggest local politicians’ timing tax enforcement efforts to achieve their preferred policy outcomes is an important channel through which political process affects tax avoidance outcomes.

Keywords: political turnovers; political cycles; corporate tax avoidance; tax enforcement

JEL Classification: G31; G34; H26; K42; P48

Suggested Citation

Liu, Qiao and Luo, Wei and Rao, Pingui, The Political Economy of Corporate Tax Avoidance (December 30, 2015). Available at SSRN: https://ssrn.com/abstract=2709608 or http://dx.doi.org/10.2139/ssrn.2709608

Qiao Liu

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Wei Luo (Contact Author)

Peking University - Guanghua School of Management ( email )

Room 461 Guanghua Building
Peking University
Beijing, Beijing 100871
China

Pingui Rao

Jinan University - Management School ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

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