When local governments get buried in debt, corporations actually stop trying to dodge their taxes.
March 24, 2026
Original Paper
Corporate Tax Avoidance as an Unintended Consequence of Local Government Debt: Evidence from China's 4-Trillion-Yuan Stimulus Plan
SSRN · 6310138
The Takeaway
Standard logic suggests government debt might signal economic instability that encourages tax dodging. In reality, fiscal stress forces local officials to crack down on enforcement and tighten administrative loopholes to ensure every possible cent is collected to service the debt.
From the abstract
Using China's 4-Trillion-Yuan Stimulus Plan as a quasi-natural experiment, we examine how local government debt expansion influences corporate tax avoidance. Our empirical results show that doubling the intensity of debt expansion significantly reduces corporate tax avoidance by approximately 1.189 percentage points. Further analysis suggests that the reduction effect is driven by enhanced tax collection and administrative enforcement. In addition, the reduction effect is more significant among