Tax Enforcement and Corporate Social Responsibility: Evidence from a Natural Experiment in China

Abstract

ABSTRACT This study investigates the effect of tax enforcement on corporate social responsibility (CSR) performance. By using the Third Phase of China’s Golden Tax Project as an exogenous shock to conduct a difference–in–differences estimation, we find that tax enforcement has a sizable positive effect on CSR performance, which is mainly achieved through improving the performance of corporations in fulfilling their responsibilities to their employees, suppliers, customer and consumer rights, and the environment. Our findings are robust to different specifications and endogeneity problems. One possible mechanism driving our results is that tax enforcement reduces corporate tax evasion, which further promotes CSR performance. Our results are particularly significant for firms in highly competitive industries or firms with high levels of business risk. Furthermore, the improved CSR performance influenced by tax enforcement ultimately increases the total factor productivity, market value, and shareholder returns of firms.