Evading by any means? VAT enforcement and payroll tax evasion in China

We study how the enforcement of value-added tax (VAT) affects Chinese firms' evasion of payroll tax, which is collected by weakly empowered agencies. Using the central gov-ernment's 2005 repeal of the agricultural tax to measure fiscal squeeze and subsequent enforcement effort of VAT collection, our instrumental variable estimation finds that the VAT enforcement leads to a significant increase in the payroll tax evasion. Examining firm heterogeneity and real responses suggests that increased payroll tax evasion mainly stems from cost optimization by small and cash-constrained private firms. Our paper echoes a growing literature to highlight the importance of understanding compliance spillover across taxes. (c) 2020 Elsevier B.V. All rights reserved.