Government Ownership and Corporate Tax Evasion: Evidence from China

We examine the effect of government ownership on tax evasion in China. After correcting for the partial observability of tax evasion, we find that state-owned enterprises (SOEs) are more likely to evade taxes and less likely to be detected than non-SOEs. After being caught for tax evasion, SOEs also pay lower penalties. We show that tax evasion is positively correlated with effective tax rates (ETRs) and the effect of government ownership on tax evasion is opposite the effect of government ownership on ETRs. Our results suggest that tax evasion is fundamentally different from normal tax avoidance typically measured by ETRs.