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Tax centralization, political connections, and corporate tax avoidance

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  • Pan, Yang
  • Wu, Xihao

Abstract

This study investigates whether and how the tax centralization reform (TCR) affects the role of political connections in corporate tax avoidance. Using China's consolidation of the State Tax Administration (STA) and Local Tax Bureaus (LTBs) as a quasi-natural experiment, we find that TCR significantly diminishes the tax-reduction advantages traditionally afforded by political connections. More specifically, our analysis shows that the reform weakens the influence of local government political ties on corporate tax avoidance strategies. Heterogeneity analysis further reveals that the moderating effect of TCR is more pronounced in regions characterized by greater government intervention. Additional tests reveal that TCR also reduces the impact of political connections on firms' tax deviation and tax risk. Collectively, these findings highlight the institutional advantages of tax centralization in curbing politically driven tax avoidance, offering important implications for emerging markets seeking to enhance tax enforcement and governance.

Suggested Citation

  • Pan, Yang & Wu, Xihao, 2026. "Tax centralization, political connections, and corporate tax avoidance," European Journal of Political Economy, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:poleco:v:91:y:2026:i:c:s0176268025001521
    DOI: 10.1016/j.ejpoleco.2025.102792
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    Keywords

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    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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