A Tale of Two Taxes: Does Corporate Income Tax Avoidance Undermine the Role of Environmental Taxation in Promoting Environmental Sustainability?
Environmental taxation aims to improve firms’ environmental performance by increasing the cost of polluting. We find that highly polluting Chinese firms increase income tax avoidance to offset additional costs caused by China’s Environmental Protection Tax Law. This effect is stronger for firms with greater financial constraints, firms in provinces with higher environmental tax rates and greater emphasis on environmental protection and firms with lower income tax avoidance prior to the law. Further, while the environmental tax on average improves polluting firms’ environmental performance at the cost of their financial performance, these effects are muted for firms that increase income tax avoidance. Overall, our findings suggest that the role of environmental taxation in promoting environmental sustainability is undermined by firms’ income tax avoidance. Our study provides important policymaking implications by identifying an unintended consequence of environmental taxation and showing how different taxes interact with each other.
Kaishu Wu is a professor at the School of Accounting and Finance, University of Waterloo (Canada). Kaishu Wu received his Ph.D. in Accounting from the Lundquist College of Business, University of Oregon. Kaishu’s general research interests lie in corporate tax planning, tax and financial reporting and corporate tax policy. Kaishu’s research has been published in leading academic journal, such as 《The Accounting Review》(UTD 24). He is also referees for famous academic journals, such as 《The Accounting Review》(UTD 24), 《Journal of Accounting, Auditing, and Finance》, 《Journal of the American Taxation Association》, etc.