Tax-Cut Policies, Accounting Conservatism, and Corporate Tax Burden Stickiness: Empirical Analysis from China

Abstract

This study explores the relationship between tax-cut policy, accounting conservatism, and corporate tax burden stickiness in Chinese listed companies from 2008 to 2019. The primary objective is to identify the underlying reasons for continued high levels of corporate tax burdens despite the introduction of tax-cut policies. An econometric model was developed to analyze the transmission mechanism of these policies affecting corporate tax burden stickiness to achieve this goal. The tax burden stickiness refers to the mismatch between the objective and subjective tax burdens. Results reveal four primary findings: Firstly, macro tax-cut policies induced micro-enterprises to soften their accounting conservatism, leading to increased corporate tax burden stickiness. Secondly, the reduced quality of corporate accounting reports, influenced by tax-cut policies, contributes to corporate income tax burden stickiness. In contrast, the VAT tax burden remains unaffected. Thirdly, compared to state-owned enterprises, private enterprises responded more sensitively to tax reduction policies by significantly decreasing their accounting conservatism level and increasing corporate tax burden stickiness. Finally, high-tech manufacturing enterprises recorded the highest increase in corporate tax burden stickiness, suggesting that different robust accounting policies exist across various industries and may be critical factors determining corporate tax burden stickiness. In practical terms, this study provides important insights into improving businesses’ understanding of tax burden patterns, enabling improved resource allocation of taxes accordingly. Additionally, it focuses on enhancing accounting conservatism to alleviate the pain of high tax burdens on such businesses. Ultimately, minimizing the stickiness of tax burdens will allow fiscal and taxation policies to better flex their regulatory muscles toward achieving effective and stable economic growth.