Anti-corruption campaign and corporate tax evasion: evidence from China

While the literature has well-documented economic consequences of corruption on economic development, whether and how corruption affects corporate tax evasion is unclear. This study uses anti-corruption investigations in China as an exogenous shock to local corruption to identify the link between corruption and firms' tax evasion behavior in a difference-in-differences framework. We present strong evidence that the anti-corruption campaign has a negative effect on corporate tax evasion. One plausible explanation is that the anti-corruption campaign conducted by the central inspection team undermined the political umbrella of companies and increased the chances of local government-enterprise collusion being detected, thereby inhibiting tax avoidance. This effect is more significant among firms in provinces with high inspection intensity, firms in economically-developed regions, large firms and firms in politically-sensitive industries. Our findings enrich the existing studies on the economic and fiscal effects of anti-corruption campaigns.