Local government debt and corporate tax avoidance: Evidence from China

Abstract

Leveraging a large sample of publicly listed companies in China from 2010 to 2021, this study investigates the impact of local government debt on corporate tax strategies. We provide compelling evidence that the scale of local government debt is positively associated with corporate tax avoidance. In addition, we find that corporate leverage ratios, financial constraints, and debt financing costs are three plausible mechanisms underlying the relationship we identified. The tax implications of local government debt are more evident among non-SOEs, small firms, and firms in financially less-developed regions. Our key findings are robust to a battery of identification strategies. Overall, this study enriches the literature on government debt and corporate tax avoidance.