Capital Mobility & Taxation in Non-OECDCountries – Evidence from China

44 Pages Posted: 14 Dec 2020

See all articles by Ling Chen

Ling Chen

Johns Hopkins University

Florian Hollenbach

Duke University

Date Written: November 01, 2020

Abstract

Do more mobile firms pay lower taxes? Much research contends that capital mobility creates downward pressure on corporate taxes, as firms can threaten to exit. A substantial share of the existing work, however, is based on country average statutory tax rates in OECD countries. We instead explore this relationship at the firm level in China. Using two comprehensive panel data sets with more than 780,000 Chinese firms over two decades, we find that firms with higher shares of mobile capital, in fact, pay higher effective tax rates. We then explore potential explanations for this counter-intuitive finding using both quantitative and qualitative evidence. We argue that in an environment lacking fiscal transparency and rule of law, collusion between local governments and businesses can partially explain the positive relationship between capital mobility and tax rates. Firms with more fixed assets have stronger incentives to invest in connections with local officials in exchange for lower tax rates compared to their mobile counterparts. We provide evidence that the positive relationship between capital mobility and tax rates is more pronounced in contexts with cozier government-business relations and less transparency.

Keywords: Political Economy, Tax, Mobility, China, Corruption, Government-Business Relations

Suggested Citation

Chen, Ling and Hollenbach, Florian, Capital Mobility & Taxation in Non-OECDCountries – Evidence from China (November 01, 2020). Available at SSRN: https://ssrn.com/abstract=3735009 or http://dx.doi.org/10.2139/ssrn.3735009

Ling Chen (Contact Author)

Johns Hopkins University ( email )

1740 Massachusetts Ave NW
Washington, DC 20036
United States

Florian Hollenbach

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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