The latest research by Professor Zhang Kezhong and his co-authors, Why Tax Cuts Cannot Reduce the Corporate Burden: Information Technology, Taxation Capacity and Corporate Tax Evasion, has been published in the authoritative Economic Research Journal, Issue 3, 2020.
This paper explores why tax cuts have been unable to reduce the corporate burden in China from the perspective of the tax capacity improvement stemming from technological advancements in information regulation. The authors introduced the technology of information regulation to the traditional “A-S tax evasion” model to explain why technology advances in information regulation increase the government's ability to collect tax, which in turn increases the cost of tax evasion and reduces tax evasion by enterprises. Micro data on listed companies from 2008 to 2016 and the “Golden Tax-III” project has been incorporated as a “quasi-natural experiment” to verify our theoretical predictions. The results show that technological advancements in information regulation have effectively reduced opportunities for tax evasion. Heterogeneity analysis revealed that private enterprises with a stronger motivation for tax evasion, enterprises supervised by local tax bureaus, and collusive enterprises that have greater difficulty conducting information regulation are more affected by the tax cuts. Moreover, the effect of reducing tax evasion is mainly focused on corporate income tax. The policy effect of the “Golden Tax-III” project is more significant in areas with higher fiscal revenue targets, which indicates that the improved information supervision capabilities can help local governments to complete their fiscal revenue tasks. Furthermore, the increase in the actual tax burden caused by the technology advances in information regulation leads to a decline in corporate profitability and slows down the rate of the expansion of assets, which have negative impacts on business operations. Therefore, it is vital to reduce the nominal tax rate of enterprises to a reasonable extent in light of the improved taxation ability caused by the technology advances in information regulation. Moreover, the technological advancements in information regulation have increased fiscal revenue, which signals possibilities for lowering the nominal corporate tax rates and optimizing tax policies in the future.
Findings from the paper provided empirical evidence to inform further improvements in tax reduction policies. First, against the backdrop of advances in information and regulatory technology and improvements in the tax collection capacity of tax authorities, it is possible to consider an appropriate reduction in the nominal corporate tax rate. This will compensate for the contrast of low perception and low access of enterprises to tax reduction policies and stabilise market expectations. In the long run, under the increasingly perfect tax collection and management system, it is crucial to further deepen the tax reform and build a tax environment with a "broad tax base and low tax burden", following the idea of "strong tax collection and management - lower tax rate", to promote substantial and inclusive tax reduction.