Does government institutional reform deter corporate tax evasion? Evidence from China

Exploiting the quasi-natural experiment of the social insurance collection system reform implemented in China in 2000, based on data from China’s industrial enterprise database from 1998 to 2006, we use the difference-in-differences method to test the impact of changing the social insurance collection institution on corporate tax evasion. We find that changing the social insurance collection institution from the social security department to the local tax department significantly deters corporate tax evasion. A series of robustness tests also support this conclusion. The reason is changing the social insurance collection institution to the local tax department increases its’ social insurance information of the enterprise, and reduces the information asymmetry between the enterprise and the collection institution. Furthermore, we find that the impact of changing the social insurance collection institution on corporate tax evasion is more evident in the samples of labor-intensive enterprises, low labor cost enterprises, and enterprises under the jurisdiction of the local tax department. These results indicate that government institutional reform is a valid way to reduce the information asymmetry between the government and enterprises, which will finally deter corporate tax evasion.