The Political Economy of Corporate Tax Avoidance*
Qiao Liu
Guanghua School of Management
Peking University
Beijing 100871, China
Phone: 86-10-6276-7993
Email: qiao_liu@gsm.pku.edu.cn
Wei Luo
Guanghua School of Management
PekingUniversity
Beijing 100871, China
Phone: 86-10-6275-0961
Email: luowei@gsm.pku.edu.cn
Pingui Rao
Jinan University
Guangzhou 510632, China
Phone: 86-20-8522-5976
Email: traopingui@jnu.edu.cn
Abstract: We exploit exogenous variation in turnovers of China’s municipal political leaders
to study how political incentives affect firms’ strategic tax avoidance behavior. We document
robust cycles in corporate tax compliance corresponding with the timing of political turnovers.
Specifically, we find that firms avoid less tax in the early period of local politicians’ terms,
but more in the remaining terms. The magnitude of the political cycles varies across
municipal city, politician, and firm characteristics. Entirely different from channels such as
the political uncertainty, the political connection, and the potential collusions between local
politicians and firm in their jurisdictions, our further analyses suggest local politicians’ timing
tax enforcement efforts to achieve their preferred policy outcomes is an important channel
through which political process affects tax avoidance outcomes.