GDP distortion and tax avoidance in local SOEs: Evidence from China

This paper examines whether GDP distortion influences the tax decisions of local SOEs. Using night light data to estimate GDP distortion, we find a negative correlation between upwardly distorted local GDP and local SOEs engaging in tax avoidance. This effect is more pronounced when the promotion-related pressure on local officials is higher and during downturns in the macro economy. Furthermore, local SOEs that undertake less tax avoidance are more likely to subsequently receive subsidies from the local government. Our results suggest that there is reciprocity in the relationship between local SOEs and local officials: local SOEs help local officials by engaging in less tax avoidance, which allows local officials to boost GDP data, and in return, local SOEs may receive more subsidies in the future.