Industrial Policy and Tax Avoidance

Abstract

Since the past three decades, China’s economy has been growing rapidly. The impact of the rapid development of China’s economy is inseparable from the government, who intervenes in the economic life through laws, policies, regulations, etc. As a way of intervention by the government, the promulgation and implementation of policies have certain purposes. In the capital market, the government changes the financing constraints of companies through the implementation of industrial policies, thus changing their tax avoidance behaviors. This paper selects the listed companies in Shanghai and Shenzhen during the Tenth Five-Year Plan and the Twelfth Five-Year Plan of National Economy and Social Development as the sample to analyze the influence of Chinese industrial policy on the tax avoidance behavior of enterprises and their internal mechanism. Our study finds that firms that are supported by industrial policies have been able to ease their financial constraints and have a lower degree of tax avoidance than those that are not supported by industrial policies. Further analysis finds that the above phenomenon is more pronounced in the non-state-owned enterprises and the regions with weaker tax enforcement. Our study not only enriches the academic literature on the microscopic mechanism of industrial policy, but also provides new empirical evidence on the factors of corporate tax avoidance.