Intergovernmental transfers and tax noncompliance

This study investigates the effect of intergovernmental transfers on firms’ tax noncompliance. Using data from China where intergovernmental transfers vary substantially, we find that a large amount of intergovernmental transfers leads to a high degree of firms’ tax noncompliance. This finding is robust to the instrumental variable approach, an analysis based on a natural experiment, and various robustness checks. We also find that firms that communicate more frequently with the government than others engage more in tax noncompliance. In addition, the composition of intergovernmental transfers matters, that is, a high proportion of conditional transfers decreases firms’ tax noncompliance. Finally, we find that intergovernmental transfers are negatively correlated with the effective corporate income tax rate.