Decentralization, privatization, and firm tax compliance

This study examines the tax compliance effect of changing the ownership structure of state-owned enterprises (SOEs) using a large dataset of Chinese industrial firms. We exploit the variation in SOEs ownership-oversight authority shifted from one level of government to either a lower one (i.e., decentralization) or to the private sector (i.e., privatization), in a difference-in-differences framework to find that both decentralization and privatization causes an increase in tax compliance as measured by effective tax rate. Additionally, we find evidence that while the decentralization results are driven by the reduced distance between a decentralized SOE and its oversight government, the privatization results appear to be driven by greater tax-scrutiny. Decentralization and privatization are often seen as strategies to improve efficiency in the affected markets. Our results suggest that changes in firm ownership strengthened the state's capacity to raise revenues in the post-SOE reform period, which partially explains the country's success in economic transition.