The Political Dynamics of Corporate Tax Avoidance: The Chinese Experience

The Accounting Review

50 Pages Posted: 18 Mar 2021

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: August 31, 2020

Abstract

In China’s political selection system, officials capable of growing local economies are rewarded with promotions. Eager to demonstrate economic achievements, newly appointed local leaders 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 anti-corruption 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.

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 (August 31, 2020). The Accounting Review, Available at SSRN: https://ssrn.com/abstract=3732303

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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