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Institutional environment, ownership and firm taxation

Evidence from China

Authors


  • We thank an anonymous referee, Jan Svejnar (the editor), Shijun Cheng, Michael Firth, participants in 2011 Asian Financial Management Symposium for helpful comments. Wenfeng Wu acknowledges financial support from the National Science Fund Committee of China (No. 71072056) and the Shanghai Pujiang Program. Wenfeng Wu also thanks the Robert H. Smith School of Business, University of Maryland at College Park for research support during his visit.

Abstract

This paper examines how ownership type and institutional environment affect firm taxation. Using a sample of Chinese-listed firms from 1999 to 2006, we find that private firms enjoy a lower effective tax rate than local state-owned enterprises. In addition, the preferential taxation of private firms is associated with local government incentives to promote local economic growth. We find that private firms located in regions with a lower level of privatization receive preferential tax treatment. Our results also suggest that decentralization and interjurisdictional competition lead to financial interdependence between local governments and private firms.

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