Factors Affecting Tax Compliance in China: Evidence from Firm-level and Individual-level


Student thesis: Doctoral Thesis

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Awarding Institution
Award date19 Oct 2017


While tax noncompliance has long been studied in the literature, the situation in developing economies has been much overlooked. This thesis aims to fill the gap and explores factors that may help improve tax compliance in China at both firm-level and individual-level.

At the firm level, using mandatory corporate social responsibility (CSR) disclosure regulations as a quasi-experiment, I examine the effect of mandatory CSR disclosure on tax avoidance of the Chinese A-share listed firms. With effect from 2008, the Shanghai and Shenzhen Stock Exchanges require specific listed firms to disclose CSR reports, which allow me to use a difference-in-differences (DID) research design to test whether firms with mandatorily CSR disclosure have less tax avoidance. The results indicate that mandatory CSR disclosure is positively associated with the current effective tax rate (Current ETR) and adjusted effective tax rate (RETR) during the post-mandatory period. Specifically, I find that the significant positive relation between mandatory CSR disclosure and tax avoidance exists only for firms under a weak tax enforcement environment. In addition, I provide evidence that firms mandatorily issuing CSR reports perform worse in the following year.

At the individual level, based on tax salience theory, this paper examines whether and to what extent the salient tax information about tax enforcement and government expenditure transparency influences individual taxpayers’ compliance willingness by using a situational experiment. The results show that salient information on tax enforcement and government expenditure significantly improves the tax compliance willingness of taxpayers from the treatment group, after controlling for the initial tax cognitive and characteristics of individuals. Furthermore, the deterrent effect of salient tax penalty information on tax compliance is more pronounced for taxpayers with taxpaying experience while the willingness to comply with tax is decreased after having the government expenditure information for taxpayers with tax-related educational background. The results have useful policy implications for how to improve the individual income tax compliance in developing countries.

The findings in this thesis are summarized as follows. First, mandatory CSR disclosure regulation is a useful supplementary method for reducing firms’ irresponsible tax avoidance. Second, by increasing individuals’ cognition about the deterrent effect and the moral cost caused by disloyal tax evasion, the salient tax information could increase individuals’ tax compliance willingness. Furthermore, the extent to which tax salience affects individuals’ tax compliance varies in accordance with individuals’ initial tax information capability. Last but not least, tax enforcement is an efficient and fundamental factor to improve tax compliance both at firm-level and individual-level. The above empirical and experimental results provide useful policy implications for improving the income tax compliance in emerging countries.