The role of tax enforcement on green innovation: Evidence from the consolidation of state and local tax bureau (CSLTB)

Abstract

Literature on environmental governance in developing countries often attributes environmental issues to the sub-national governments’ lenient enforcement of the law. Based on the data of A-share listed companies spanning from 2010 to 2020, this study conducts a difference-in-differences estimation exploiting an exogenous shock in tax enforcement caused by the Consolidation of State and Local Tax Bureau (CSLTB) in China. We identify strong evidence that the CSLTB decreases corporate green innovation, which is consistent across a range of robustness checks. Mechanistic tests show our primary discoveries are motivated by the liquidity constraint channel, which is manifested by an improvement in firms’ effective tax rate, cash holdings, and a decrease in dividend payments. Finally, our study reveals this negative effect exerted by tax enforcement with respect to corporate green innovation becomes particularly pronounced among firms with strong financing constraints, poor profitability, strong legal environment, non-state-owned firms, and poor tax transfer capability. Overall, this study enriches the study of tax enforcement and provides further insight into the environmental effects of non-environmental policies.