Tax Enforcement and Corporate Social Responsibility: Evidence from a Natural Experiment in China

ABSTRACT

This study investigates the effect of tax enforcement on corporate social responsibility (CSR) performance. By using the Third Phase of China’s Golden Tax Project as an exogenous shock to conduct a difference–in–differences estimation, we find that tax enforcement has a sizable positive effect on CSR performance, which is mainly achieved through improving the performance of corporations in fulfilling their responsibilities to their employees, suppliers, customer and consumer rights, and the environment. Our findings are robust to different specifications and endogeneity problems. One possible mechanism driving our results is that tax enforcement reduces corporate tax evasion, which further promotes CSR performance. Our results are particularly significant for firms in highly competitive industries or firms with high levels of business risk. Furthermore, the improved CSR performance influenced by tax enforcement ultimately increases the total factor productivity, market value, and shareholder returns of firms.

KEYWORDS:

• Tax enforcement
• corporate social responsibility
• China
• quasi-natural experiment

JEL:

• G34
• M14
• H2

Acknowledgment

We thank Paresh Narayan (the editor), associate editor, two referees, and seminar participants at Zhongnan University of Economics and Law for helpful comments. We acknowledge the financial support of the Major Project of National Social Science Foundation of China (Grant No. 21ZDA010) and the National Natural Science Foundation of China (Grant No. 71772178).

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. Refer to Xing and Whalley (2014) and Li, Wang, and Wu (2020) for detailed information on GTP.

2. We use detailed information on China’s GTPIII as described in Section 2.1 to identify the treatment status for each firm located in a certain province for each year while creating this dummy variable.

3. Data can be downloaded from http://stockdata.stock.hexun.com/zrbg/.

4. A detailed description of Hexun’s CSR evaluation systems and index construction can be seen from http://stock.hexun.com/2013/gsshzr/index.html (in Chinese).

5. Definitions of all variables in model (1) can also be found in the appendix.

6. To save space, only the coefficients of the main variables are reported in the rest of our tables. The detailed results are available upon request.

Additional information

Funding

This work was supported by the Major Project of National Social Science Foundation of China (Grant No. 21ZDA010) and the National Natural Science Foundation of China (Grant No. 71772178).