Research On Corporate Tax Avoidance Based On The Local Fiscal Pressure

Corporate tax avoidance is a common phenomenon in both developed countries and developing countries.According to the World Bank’s survey of 102 developing countries in 2014,for the income of 1 RMB,firms tend to conceal 0.213 RMB on average in order to avoid the tax burden,and the data is as high as 0.419 in China.The vagueness of tax laws,the imperfection of legal system and the weak supervision are the main reasons accounting for the fact that tax avoidance is much more prominent in China than that of developed countries.The existing literature summarizes the influencing factors of corporate tax avoidance from the macro-level(society-level)and micro-level(firm-level).However,in addition to the contents above,the local government,as the direct beneficiary and supervisor of tax revenues,has great motivation to intervene in corporate tax decision-making based on their fiscal conditions and intentions.China is under the system of tax distribution and decentralized authority,which is featured with many unique characteristics.On the one hand,the central government has the dominant power on political affairs and the appointment of local officials.The central government also shares great proportion of local fiscal revenues.On the other hand,the local government is delegated to be responsible for local construction,economic development and some other administrative affairs on the whole.The above characteristics of "transferred-up financial power and transferred-down administrative power" lead to great fiscal pressure on the local government.In particular,the Chinese government has a heavy dependence on the revenues from land-transferring fees,and the so called land finance consists of an important part of the fiscal revenue.The economic consequences of land finance have also attracted extensive attention from academic researchers,practitioners and policy makers.In this background,this paper investigates the relationship between local fiscal pressure induced by land transfer revenues reduction and corporate tax avoidance in the view of theory and practice.Based on the literature review and a sample of unlisted industrial firms in China,this paper uses the changes of the proportion of land transfer revenues as the measurement of local fiscal pressure,and discusses the influencing effect of the local government on firms’tax decision-making in their jurisdiction.To be specific,the main conclusions are as follows.Firstly,the result presents that the local government’s fiscal squeeze stemming from the loss of land transfer revenues is associated with lower tax avoidance of firms under its jurisdiction.When the local government has relatively higher fiscal pressure,its role on firms is more likely to be changed from the "helping hand" to "grabbing hand".Considering the fact that local governments are endowed with great discretionary power in the process of tax collection,it’s more likely that they would make up the loss of revenues by increasing tax revenues from firms in the region.Theoretical and empirical evidence show that the local government’s fiscal squeeze stemming from the loss of land transfer revenues gives rise to more stricter tax enforcement,and eventually prohibits corporate tax avoidance under its jurisdiction.The conclusion survives a series of robustness checks,including 2SLS tests,additional control variables,other measurements of key variables and alternative sub-samples.Next,this paper discusses the moderating factors from the perspective of official promotion pressure,local economic conditions and firm internal characteristics,and the results show that the association between fiscal pressure and corporate tax avoidance differs in various conditions.To begin with,we find that the tax avoidance-reduction effect brought by local fiscal pressure is more obvious when local officials are under greater promotion stress.In China,local officials are followed and motivated under the tournament system,indicating that good economic performance during the terms of officials is one of the necessary factors ensuring their political careers in the future.Therefore,it’s reasonable to expect the officials under much stress are motivated to suppress corporate tax avoidance when facing greater fiscal pressure.At the same time,the effect of local fiscal tightness is more pronounced when the city bears lower economic growth,higher historical averaged deficit and has more dependence on land financing.In this logic,this paper proposes that the association between local fiscal pressure and corporate tax avoidance is more stronger in cities with lower economic predictors.In addition,this paper further documents that the impact of local fiscal pressure on tax avoidance is more noticeable in firms with higher financial constraints and in domestic firms,considering that firms are more likely to engage in aggressive tax activities under financial constraints to boost liquidity by saving amounts of considerable cash,and foreign firms have relative better governance that helps to reduce tax avoidance.Finally,I re-examine the empirical model by using Chinese A-share listed firms in the same period as the sample in the main test.The results show that the conclusion no longer exists.That’s to say,the local fiscal squeeze induced by the loss of land transfer revenues fails to reduce the listed firms’ tax avoidance.The above findings are attributed to the following two perspectives,i.e.,information asymmetry and regulation intensity.Compared to unlisted firms,the information of listed ones’ is more transparent due to the attention and supervision of the government,media,investors and other relevant stakeholders,which makes corporate tax avoidance activities to be more difficult and costly,and eventually leads to less tax avoidance.Moreover,this paper investigates the mechanism between local fiscal pressure and corporate tax avoidance.I find that the local government is inclined to strengthen the tax enforcement in the certain region under the greater fiscal pressure,which eventually results in less aggressive tax activities at firm level.The findings provide supplementary evidence on the impact of local tax enforcement.In general,this paper enriches the literature of the relationship between the local government(macro-level)and corporate decision-making(micro-level),and emphasizes the role of the local government in shaping corporate tax behavior.Moreover,I carry out the research from the perspective of land finance.This may reflect the fact that land financing could improve the local income by reducing corporate aggressive tax activities,acting as one of the important driving forces for China’s economic growth.By incorporating factors such as local fiscal pressure and officials’ promotion motivation into the framework of corporate tax behavior,this paper has important implications for the government to formulate tax policies rationally and achieve the goal of "deepening tax system reform and improving the local tax system".Last but not the least,it also provides reference for mangers to better operate firms from the perspective of local government.