Tax incentives and corporate social responsibility: The role of cash savings from accelerated depreciation policy

Abstract

This study examines the effect of tax incentives (TIs) on corporate social responsibility (CSR) performance as a key driver of sustainable development. While the determinants of CSR at the firm level have been widely discussed, how TIs influence CSR has scarcely been explored. Based on firm-level data from China from 2010 to 2018, we identify the causal effect of TIs on CSR using the accelerated depreciation policy for fixed assets. We find that TIs promote CSR performance, primarily manifested in three dimensions: employee; supplier, customer, and consumer; and the environment. TIs increase CSR performance through cash savings and pollution abatement mechanisms. Furthermore, we find that TIs reduce firm performance, mainly in firms that increase their CSR performance. Our evidence suggests that TIs can be an incentive for CSR, although some increases in CSR may come at the expense of corporate performance. • We investigate tax incentive (TI) effects on corporate social responsibility (CSR). • TIs are positively related to firms' CSR performance. • TIs promote employee; supplier, customer, and consumer; and environmental CSR. • TIs increase CSR performance by cash saving and pollution abatement mechanisms. • TIs reduce firm performance, primarily in firms with increased CSR performance.