Digitalization of tax administration and corporate performance: Evidence from China

Abstract

This paper finds a direct causal relationship between company performance and the digitization of tax collection. Using the “quasi-natural experiment” of the implementation in 2013 of the third stage of the China Tax Administration Information System (CTAIS-3) pilot, we conduct an empirical test based on micro-data of listed companies from 2009 to 2021 and discover that by increasing taxes on firms, lowering the size of new investments, and intensifying financial problems, which result in lower operational income, the critical CTAIS-3 pilot for digitizing tax administration significantly reduces corporate performance. Enhanced tax enforcement is particularly prominent if a firm is with significant financing constraints, is a non-state-owned enterprise, or is bigger. Furthermore, we find that the implementation of the CTAIS-3 pilot has increased fairness because it is more effective in lowering the performance of large-scale enterprises, primarily because it reduces the government subsidies and tax benefits that these companies receive.