The Unintended Consequence of Land Finance: Evidence from Corporate Tax Avoidance
51 Pages Posted: 10 Feb 2018 Last revised: 9 Aug 2019
Date Written: October 10, 2018
The heavy reliance of Chinese local governments on land transfer revenues, which is termed land finance, has received much attention from researchers, practitioners and policy makers. Using a large sample of industrial firms, we explore the impact of local governments’ dependence on land finance on corporate tax avoidance. We find robust evidence that a decrease in the local governments’ land transfer revenues leads to lower tax avoidance by firms within the jurisdiction. The tax-avoidance-reduction effect is stronger in cities with lower economic growth, and where the political leaders have stronger promotion incentives. Also, the effect is more pronounced among unsubsidized firms and domestic firms, which face higher financial constraints. Further analysis reveals that the decline in land transfer revenues results in stricter tax enforcement, which serves as the mechanism for the decreased tax avoidance. Overall, our findings suggest that land finance could be an important driver of China’s economic growth via its influence on corporate taxation.
Keywords: Fiscal pressure; tax avoidance; land transfer revenue; political incentives
JEL Classification: H26, H71, M48
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