The Political Economy of Corporate Tax Avoidance
56 Pages Posted: 1 Jan 2016
Date Written: December 30, 2015
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
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