Local Government Tax Competition and Corporate Tax Avoidance

Xiaoyu Pei

doi:10.54691/xn258z77

Authors

Xiaoyu Pei

DOI:

https://doi.org/10.54691/xn258z77

Keywords:

Local government tax competition, corporate tax avoidance, tax administration, economic policy uncertainty, fiscal pressure.

Abstract

This study investigates the impact of local government tax competition on corporate tax avoidance within China's fiscal decentralization framework. Using panel data from A-share listed companies and prefecture-level cities (2002–2024) and employing a two-way fixed effects model, we systematically analyze their relationship and underlying mechanisms. Results show that tax competition significantly increases corporate tax avoidance, a finding robust across multiple stability tests. Mechanism analysis indicates that tax competition promotes tax avoidance primarily by weakening tax enforcement, increasing economic policy uncertainty, and intensifying local fiscal pressure. Heterogeneity tests reveal that state-owned enterprises and firms in central and western regions are more sensitive to these effects. This study highlights the role of institutional quality competition in shaping corporate tax avoidance and offers insights for improving tax governance and modernizing China's tax administration system.

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