The Impact Of Collusion On Corporate Tax Evasion And Performance

Corporate tax evasion is widespread, both in developed and developing countries. The total amount of tax evaded by Chinese companies are also very huge. In2009, through a comprehensive tax inspection of the key sources of business systems, the Chinese National Bureau of Tax found that the total amount of tax evaded for the full year reached to68.84billion yuan, of which the amount of tax evaded by63key large-scale enterprise group reached to22.95billion yuan, accounting for33%of the total amount of tax. Existing literatures mainly focus on the motivation of tax evasion with the corporate as entry point, and considering tax rate, the probability of audit by tax authorities, the punishment for evading and some other internal factors consist of main reasons of corporate tax evasion. In fact, in addition to the active tax evasion, there are some kind of passive tax evasion, which is result from the collusion between local government and firms. In order to maximize the local GDP, local governments will try to attract frims with enough mobility in two dimensions:expenditure and revenue, the latter means offers some attractive tax policies.When local governmentsdonot have the authority to adjust the statutory tax rate, they tend to reduce the effective corporate tax burden by lower the tax enforcement efforts in order to attract firms. This is in essence a collusion behavior, leading to a decline in the probability of tax evasion being detected and the opportunity cost of corporate tax evasion and finally result in more evasion of corporate tax.Local government-firm collusion is an important cause of Chinese corporate tax evasion. Under China ’s decentralized authoritarian system, the central government controlled the personnel appointment, promotion channels of local officials and so as to promote local governments to follow the central policies. But most of the administrative and economic affairs are delegated to deal with by local governments, such as to supply public goods and to practice law and so on. In theory, an endogenous problem faced by a highly centralized authoritarian regime is asymmetric information between the central government and local governments. Then, there is a moral hazard problem generated by local governments who pursuit the growth of GDP, that is the local governments will choose to collude with firms, so as to promote the development of local economy at the expense of the central government. For example, they will choose to lower the level of tax enforcement and to attract firms by conniving evasion of tax. This article investigates the relationship between corporate tax evasion and local government-firm collusion empirically. Furthermore, this paper chooses the National Tax Bureau and the Local Tax Bureau as the collusion implementing agencies separately, and make use of the rich policy practice during China’s reform process to measure local government-firm collusion Specifically, the main conclusions of this aiticle are as follow:Firstly, as the tax collection agency directly under the control of local government, the Local Tax Bureau is the mainly implementing agency of the local government-firm collusion, and the poor enforcement of law is an important cause of wide range tax evasion. As the local government control personnel appointment and removal of the local tax system, therefore, compared to vertical management system of National Tax Bureau, local governments are more likely implement local government-firm collusion through local tax bureau, by cutting corporate tax or lowering tax enforcement illegally, so as to attract firms with enough mobility. In addition, this paper also found that the local tax enforcement is targeted mainly to firms with enough mobility, such as private firms or mix-ownership firms. The results demonstrate the motivation of local government to lower tax enforcement, that is to compete for liquidity capital.Secondly, although National Tax bureau is under vertical management, but in the background of collusion, tax officials in the national tax system will be captured by local government, National Tax Bureau will also become the implementing agency of local government-firm collusion. This paper takes the rotation of directors of the National Tax Bureaus (NTB) since1998as a natural experiment to measure the collusion. We find that, firstly, the local NTB directors collude much more than rotated directors. Secondly, collusion is correlated to the term of directors, the effect of rotated directors disappeared after eight years. Thirdly, the tax evasion from collusion only exists within the mobile companies, such as the foreign and private firms. Lastly, collusion exists only in those hardly regulated taxes, such as corporate income tax, while has no impacts on VAT.Finally, collusion is " bad" from the view of central government, resulting in a loss of central tax revenues, but for the corporate itself, the relaxation of tax enforcement equivalent to an tax-cut, which will result in a change in corporate performance. The empirical results approved the proposition, we find that corporate that are affected by local government-firm collusion has a significant improvement in its level of investment in fixed assets and productivity. Thus, to some extent, the tax competition among local governments playing a role as " helping hand ". The results also mean that a tax-cut policy is good for the improvement of corporate performance and the long-run development of China’s economy.