Air pollution and tax avoidance: New evidence from China

By utilizing listed firms in mainland China during 2008 to 2017, this paper investigates how air pollution affects corporate tax avoidance. The results show that higher levels of air pollution promote tax avoidance by firms subject to the pollution. To investigate this linkage, we conduct a series cross-section analyses which confirm the incentivizing effect of air pollution on corporate tax avoidance behavior. The results indicate that the association between air pollution and corporate tax avoidance is more pronounced for firms in high-polluting and monopolistic industries, state-owned enterprises and in districts where the government exerts less tax and economic influence. We apply robust checks, including the random discontinuity design regression, instrumental variable regression in order to confirm the casual effect of air pollution on corporate tax avoidance behaviors. Our results show that air pollution shapes corporate tax avoidance through employees’ mood and operating efficiency. This study not only enriches the studies about how the external natural environment can reshape firm’s corporate tax avoidance behaviors, but also provides strong evidence that the government needs to improve environmental law enforcement. More generally, there are policy implications for developing and developed countries alike: they need to attach much greater importance to environmental regulation and financial governance.