Can government improve tax compliance by adopting advanced information technology? Evidence from the Golden Tax Project III in China

Abstract

This paper explores the tax compliance effects of adopting advanced information technology by tax bureau. Although many governments adopt advanced information technology in tax collection, little is known about the effect on tax compliance. Using difference-in-differences method, we exploit a staggered reform in which tax authorities adopt a comprehensive information reporting system in China, the Golden Tax Project III. Employing listed firm level data from 2010 to 2017, using book-tax difference and its remaining component which cannot be explained by earnings management as proxy measures of tax sheltering, we find that the adoption of GTP III decreases tax sheltering levels by a 1.88 percentage point. The effect is stronger for companies with higher tax rate. By exploring channels, our results suggest that the effect works by enhancing third-party reporting and by improving tax enforcement capacity in provinces that lack tax inspectors.