Tax enforcement and efficiency wages: Evidence from China’ Golden Tax Project III

Abstract

This paper examines the impact of technology-enhanced tax enforcement on efficiency wages. Using the Golden Tax Project III (GTP III) implementation in China as a quasi-natural experiment and employing the difference-in-differences method, we show GTP III decreases efficiency wage payments, indicating employees bear part of the tax burden from intensified enforcement. The effect is more pronounced in firms with higher labor intensity, greater tax compliance, lower job mobility, higher institutional investor ratio, and lower political connectedness. We show that firms strategically apply wages to accommodate local tax enforcement to maintain their profitability.