Administrative procedures as tax enforcement tools

We study how common administrative procedures affect firm tax evasion. We begin with the counter-intuitive observation that many firms bunch above, rather than below, large notches in China’s corporate income tax. Cross-sectional patterns suggest that administrative procedures in the prepayment and refund system served as de facto enforcement tools that prevented some firms from accessing the reduced tax rates below the notches. Following a regulatory reform that eliminated these procedures, bunching below the notches increased dramatically. The results imply a trade-off between reducing administrative barriers and allowing much taxpayer non-compliance in low-compliance environments. •Chinese firms bunched above, rather than below, a series of large CIT notches.•Evidence suggests tax officials used prepayment and refund rules to lower evasion.•Removing these administrative procedures increased probable tax evasion.