Involuntary political connections and private firms' tax avoidance

This study investigates the effects of government intervention on firms' tax avoidance. Based on a unique setting in China, where the geographic distance between firms and local governments is set exogenously, we find that the government involvements significantly increase firms' tax avoidance. Further analysis shows that governments' potential expropriations causally increase firms' incentives on tax avoidance, which eventually leads firms facing better investment opportunity or severer industry competition to accumulate more internal capital. Overall, we fill the literature gap by presenting the casual evidence about local governments' grabbing hands on firms' tax avoidance in market without diversified financial channels.