Like adding oil to the fire or pouring water on it? The effect of the digital economy on corporate tax avoidance: Evidence from China

With the rapid advancement and extensive application of digital technology, digitalization has become a prominent trend. The growth of digital economy has profoundly influenced corporate behavior. This study uses a dataset comprising over 2.8 million corporate samples from China to examine the effect of digital economy development on corporate tax avoidance and the underlying mechanisms. By constructing the Chinese urban digital economy development index and integrating it with the Chinese tax survey data from 2011 to 2015, the study presents the following findings: (1) The development of digital economy significantly reduces corporate tax avoidance in certain regions. (2) The digital economy mitigates tax avoidance through two mechanisms: alleviating corporate financing constraints and enhancing regional tax collection efficiency. (3) The inhibitory effect of digital economy on tax avoidance exhibits significant heterogeneity. The effect is pronounced in non-state-owned and small enterprises but negligible in state-owned and large enterprises. Moreover, it is stronger in regions with high levels of financial development and stringent tax enforcement than in regions with low financial development and less stringent tax regulation. In conclusion, leveraging the digital economy's potential to ease financing constraints and improve tax collection efficiency can effectively curtail corporate tax avoidance as digital economic development progresses.