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Evading by any means? VAT enforcement and payroll tax evasion in China

Lixing Li (), Kevin Liu, Zhuo Nie and Tianyang Xi

Journal of Economic Behavior & Organization, 2021, vol. 185, issue C, 770-784

Abstract: We study how the enforcement of value-added tax (VAT) affects Chinese firms’ evasion of payroll tax, which is collected by weakly empowered agencies. Using the central government’s 2005 repeal of the agricultural tax to measure fiscal squeeze and subsequent enforcement effort of VAT collection, our instrumental variable estimation finds that the VAT enforcement leads to a significant increase in the payroll tax evasion. Examining firm heterogeneity and real responses suggests that increased payroll tax evasion mainly stems from cost optimization by small and cash-constrained private firms. Our paper echoes a growing literature to highlight the importance of understanding compliance spillover across taxes.

Keywords: Tax evasion; Value-added tax; Payroll tax; Evasion substitution (search for similar items in EconPapers)
JEL-codes: D22 H25 H26 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jebo.2020.10.012

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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