Abstract
Although labor costs are crucial inputs in corporate production, only little is known about their effects on corporate tax avoidance. Using a large dataset of industrial firms in China, we introduce a geographic information system technique that considers the discontinuities of minimum wage at county borders to identify the causal effect of labor costs on tax avoidance. We present strong evidence that minimum wage hikes significantly reduce the sensitivity of firms’ imputed profits to their reported profits, which indicates that firms improve their tax avoidance activities. Our findings are particularly pronounced for non-state-owned firms, firms with financial constraints, firms with low average wage, firms in industries with high labor intensity, and firms located in regions with high government intervention and low fiscal deficit.
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