E2023013                                                       2023-09-18

Yongwei Ye

Yunqing Tao (Corresponding author)

Zhuo Huang

Nan Sun

Abstract: In recent years, various studies have examined the anomaly of a sudden increase in corporate investment in the fourth quarter and explained the tax planning logic behind this unusual investment phenomenon. However, the literature offers limited analysis of the influencing factors and economic consequences associated with these abnormal investments. Therefore, based on the quasi-natural experiment of the Golden Tax III project, characterized by enhanced digital tax enforcement, this study empirically tests the causal relationship between digital tax enforcement and corporate abnormal investment using a difference-in-differences approach. Benchmark results indicate that digital tax enforcement significantly increases corporate abnormal investments, and that this effect is more pronounced among firms with high tax burdens, severe financing constraints, high capital intensity, and weak cost-shifting ability. The mechanism test suggests that the above findings are attributable to the fact that increased digital tax enforcement makes it more difficult for firms to avoid taxes illegally, thereby increasing the incentive for firms to use abnormal investments to avoid taxes in a compliant manner. Further results show that the implementation of the policy significantly impairs the operating performance of firms, implying that abnormal investments can harm the long-term development of firms while achieving tax avoidance. Overall, this study has important theoretical and practical implications for how the tax reform could be revised to promote the effective investment of firms.

Keywords: Digital tax enforcement; Golden Tax III project; Tax planning; Abnormal investment

JEL Classification: D21; D22; D92; G31

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