GOVERNMENT SIZE AND TAX EVASION: EVIDENCE FROM CHINA

This paper investigates how government size affects tax evasion in China. Using matched county-firm data for 1998-2005, we estimate the impact of county government size on the relationship between a firm's reported profit and imputed profit based on the national income accounts. A larger government is found to be correlated with more severe tax evasion, especially for state-owned and collectively-owned firms. Such an effect is stronger when local governance become worse. This paper shows that a large government does not bring about a strong state capacity to enforce tax rules at the local level in China.