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Tax incentives and firm compliance: Evidence from China

Author

Listed:
  • Fu, Jingjing
  • Liu, Zhikuo
  • Wang, Shuyi
  • Zhao, Xiaolu

Abstract

We examine how tax policy affects firm compliance, drawing on a 2003 tax incentive implementation campaign in Chongqing, China. Local officials promoted a preferential corporate income tax rate treatment (15% versus 33%) under the Western Development Project through door-to-door visits. Using a difference-in-differences design, we find that firms became more likely to report positive profits at the extensive margin, leading to higher declared profits and tax payments. For newly compliant firms, the increases came from reported sales and costs rather than real growth in investment or employment. In contrast, consistently compliant firms raised investment and employment, while output did not increase significantly in the short run. Overall, these responses increased local fiscal revenue by about 24%. The findings show that compliance can be improved not only by deterrence but also by credible and favorable tax regimes.

Suggested Citation

  • Fu, Jingjing & Liu, Zhikuo & Wang, Shuyi & Zhao, Xiaolu, 2026. "Tax incentives and firm compliance: Evidence from China," China Economic Review, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:chieco:v:99:y:2026:i:c:s1043951x26000970
    DOI: 10.1016/j.chieco.2026.102747
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    Keywords

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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