Why tax cuts cannot reduce the corporate burden: information technology, taxation capacity and corporate tax evasion

【Author】

ZHANG Kezhong;OUYANG Jie;LI Wenjian

【Institution】

School of Public Finance and Taxation, Zhongnan University of Economics and Law;School of Management, Huazhong University of Science and Technology;School of Public Finance and Taxation, Zhongnan University of Economics and Law

【Abstract】

Tax cuts are an important means of implementing proactive fiscal policies and promoting economic recovery. Faced with the double pressure from the international wave of tax cuts and the domestic economic downturn, the Chinese government recently introduced a series of tax reduction policies. However, the actual tax burden of enterprises remains relatively high, and the tax reduction is not obvious. This paper explores why tax cuts have been unable to reduce the corporate burden in China from the perspective of the tax capacity improvement stemming from technological advancements in information regulation. In this paper, the authors introduce the technology of information regulation to the traditional “A-S tax evasion” model to explain why technology advances in information regulation increase the government’s ability to collect tax, which in turn increases the cost of tax evasion and reduces tax evasion by enterprises. The authors then use microdata on listed companies from 2008 to 2016 and the Golden Tax-III project as a “quasi-natural experiment” to verify the theoretical predictions. The results show that technological advancements in information regulation have effectively reduced opportunities for tax evasion. To address endogeneity concerns, four robustness tests were conducted. First, the authors conduct counterfactual analysis to verify that the parallel trend assumption is satisfied, which eliminates the interference of the expected effect and prior factors on the benchmark results. Second, the authors conduct detailed analyses of the “replacing the business tax with VAT” policy and the tax reduction policy to ease the concerns related to the effects of confounding factors during the sample period. Third, the authors replace the indicators of corporate tax evasion to reduce the measurement error of the core variables as much as possible. Finally, the authors conduct a non-parametric permutation test to exclude the possibility of random results. The heterogeneity analysis reveals that private enterprises with a stronger motivation for tax evasion and enterprises supervised by local tax bureaus are more affected by the tax cuts. Moreover, the effect of tax evasion reduction mainly focused on corporate income tax. The policy effect of the Golden Tax-III project is more significant in areas with higher fiscal revenue targets, which indicates that the improved information supervision capabilities can help local governments to complete their fiscal revenue tasks. In the extended analysis, the authors examine the impact of technology advances in information regulation on corporate performance and fiscal revenue. The authors find that the implementation of the Golden Tax-III project significantly increases the actual tax burden of enterprises. These results show that although the improved taxation capacity reduces the possibility that enterprises will engage in tax evasion, it largely offsets the positive effects of the tax reduction policies in the same period. A reasonable explanation is provided for the current phenomenon whereby tax cuts cannot reduce the corporate tax burden. Furthermore, the increase in the actual tax burden caused by the technology advances in information regulation leads to a decline in corporate profitability and slows down the rate of the expansion of assets, which have negative impacts on business operations. Therefore, it is vital to reduce the nominal tax rate of enterprises to a reasonable extent in light of the improved taxation ability caused by the technology advances in information regulation. Moreover, the technological advancements in information regulation have increased fiscal revenue, which signals possibilities for lowering the nominal corporate tax rates and optimizing tax policies in the future. This paper makes three main contributions to the literature. First, this paper examines the impact of emerging technologies such as big data and cloud computing on tax collection and supervision and identifies the causal relationship between information supervision capability and corporate tax evasion. Second, this paper introduces technological advancements in information regulation to the traditional “A-S tax evasion model,” which provides a more comprehensive perspective on the “audit-punishment” taxation strategy. Third, this paper provides a reasonable explanation of why tax cuts cannot reduce the corporate tax burden.

References

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Springer Journals Database

Total: 24 articles

  • [1] Gao Peiyong(Institute of Finance & Trade Economics,CASS), Riddle of the Sustained and Rapid Tax Increase in China, Economic Research Journal,
  • [2] Lü Bingyang and Guo Qingwang, What are the Sources of the Rapid Growth in Chinese Tax Revenues? An Explanation within the Framework of Tax Capacity and Tax Effort, Social Sciences in China,
  • [3] Danglun Luo Zhu Wei, Political Connection and the Tax Avoidance of Enterprises——The evidence from Chinese Private Listing Enterprises, South China Journal of Economics,
  • [4] Sha Yu;Shu Geng;Yan Kong;, How to Tax People in Developing Countries: Insights from a Tax Compliance Experiment in China, Journal of Public Administration,

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