Government tax collection incentives and corporate taxation behaviour: Evidence from China

Abstract

AbstractUsing a proprietary dataset of provincial‐level quarterly tax collections from the Ministry of Finance of China, this study examines governments' management of tax collections in the final quarter of the year and how tax collections progress throughout the year affects corporate tax payments in the final quarter. Our results show that firms in provinces that fall behind with tax collections tend to pay more taxes in the final quarter, suggesting local governments may impose higher taxes on firms to meet their annual targets. Local tax authorities often rely on politically connected firms and exploit tax vagueness as a means of collecting additional taxes. The relationship between government tax collection incentives and corporate tax payments is particularly notable for firms with higher profitability. Furthermore, firms that help the local government to meet its yearly tax targets do not pay significantly lower taxes in the following year. Overall, our study provides evidence that government tax collection incentives significantly influence corporate tax payments in China, driven by fiscal needs and political motivations.