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Labor cost and corporate tax avoidance

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  • Xiang, Junyi
  • Zhu, Ling
  • Kong, Dongmin

Abstract

Although labor costs are crucial inputs in corporate production, only little is known about their effects on corporate tax avoidance. Using a large dataset of industrial firms in China, we introduce a geographic information system technique that considers the discontinuities of minimum wage at county borders to identify the causal effect of labor costs on tax avoidance. We present strong evidence that minimum wage hikes significantly reduce the sensitivity of firms’ imputed profits to their reported profits, which indicates that firms improve their tax avoidance activities. Our findings are particularly pronounced for non-state-owned firms, firms with financial constraints, firms with low average wage, firms in industries with high labor intensity, and firms located in regions with high government intervention and low fiscal deficit.

Suggested Citation

  • Xiang, Junyi & Zhu, Ling & Kong, Dongmin, 2023. "Labor cost and corporate tax avoidance," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 338-358.
    • Handle: RePEc:eee:jeborg:v:205:y:2023:i:c:p:338-358
    DOI: 10.1016/j.jebo.2022.11.013
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    More about this item

    Keywords

    Minimum wage; Tax avoidance; Geographic information system; Private firms;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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