Temperature and corporate tax avoidance: Evidence from Chinese manufacturing firms

Abstract

This study estimates the effects of temperature on corporate tax avoidance in the context of climate change, using data from Chinese manufacturing firms. The firms exhibit increases in tax avoidance activities in response to high temperatures. We find that an additional day with temperature above 90 °F results in a 0.097 percentage-points decrease in effective tax rate (ETR), or 0.67% evaluated at the mean level, with effects concentrated on labor-intensive firms. We also find evidence that higher tax compliance can be a cover for tax avoidance activities in the previous year. This provides a possible way for tax authorities to detect tax noncompliance. In addition, we offer a comparatively new perspective to understand the undesirable impacts of climate change, that is, high temperatures can lead to opportunistic behaviors of firms. Using temperature, which is exogenous to the firms' policies, we also draw a more reliable causal inference regarding the effect of negative shocks on corporate tax avoidance.