The Tax Depression Effect of Enterprise Organization Form
LU Yuanping, HE Tianxiang, ZHAO Ying, CUI Xiaoyong
School of Public Finance and Taxation/Innovation and Talent Base for Income Distribution and Public Finance, Zhongnan University of Economics and Law; School of Economics, Peking University
Summary:
Optimal tax system design emphasizes improving relevant systems within the tax field, yet it overlooks the possibility that enterprises respond to regulation by adjusting their organizational forms. Notably, an increasing number of sole proprietorship enterprises have emerged in the market, consistent with the rising number of affiliated enterprises. Existing studies mainly analyze tax evasion from the perspective of corporate finance and overlook the impact of corporate organizational forms on tax compliance and their resulting institutional consequences. Taking the commercial registration system reform in March 2014 as a quasi-natural experiment, this paper analyzes the impact of the reform on the market entry, tax payment behavior and factor allocation efficiency of sole proprietorship enterprises by using matched administrative data from Chinese firms, taxation and corporate recruitment data from 2012 to 2014. This study provides empirical evidence for identifying the strategic selection of organizational forms and their subsequent tax effects. This study yields four main results. First, the commercial registration system reform has promoted the entry of sole proprietorship enterprises into the market and these enterprises remained small in scale. Second, the mechanism is that the reform has lowered registration thresholds and increased the number of administrative licenses. Third, the actual tax burden of such enterprises has declined while tax-related violations have increased, which reflects certain tax avoidance intentions. Fourth, by analyzing equity affiliation data of each enterprise, we find that the registration reform has increased internal connections within enterprise groups but has not created employment or boosted investment. This has weakened the social benefits of the reform to a certain extent and become an important aspect for understanding tax administration of specific enterprise organizational forms. The above conclusions provide several policy implications for the development of sole proprietorship enterprises and tax governance practices. First, we should strengthen the synergistic governance effect of market access and tax collection and administration. Industry and commerce authorities can provide more sufficient basic information and operating status of market entities, which will help tax departments achieve more effective tax collection and administration. Therefore, we should actively promote cross-regional, cross-level and cross-departmental coordination and cooperation, improve the mechanism of information sharing between departments, and further strengthen internal coordination and cooperation within the government. Through information sharing and joint law enforcement, we can better detect market disorders, reduce tax risks and improve the governance and service capacity of the government. Second, the establishment of an information monitoring and feedback mechanism for job creation is crucial. Specifically, we should intensify information monitoring of job creation, establish a complete enterprise information database and employment statistics system to help the government and relevant departments keep abreast of the employment situation of enterprises. At the same time, we should set up an information feedback mechanism for job creation. This will support the growth of small and medium-sized enterprises and sole proprietorship enterprises, promote the coordinated and integrated development of large, medium and small enterprises, and improve the quality of employment. Third, the tax framework must be refined to standardize preferential treatments for different entity types, thereby ensuring fiscal equity. The government should accelerate the issuance of regulations and guidelines on the application of tax preferential policies for specific organizational forms. In addition, we should establish and improve tax audit and supervision mechanisms, guiding all types of enterprises to enhance their management systems, strengthen compliance awareness, fulfill social responsibilities, and ensure that tax incentives genuinely benefit the development of their intended beneficiaries. The academic contributions of this paper are threefold. First, we supplement existing research on tax avoidance by enterprises through specific organizational forms. Taking the market entry motives of sole proprietorship enterprises as the entry point, this paper analyzes the impact of the commercial registration system reform that lowers the market entry barriers on the market entry and tax payment behavior of sole proprietorship enterprises, and reveals that entry cost is also an important institutional factor affecting tax avoidance through organizational forms. Second, existing studies focus on the tax evasion behaviors of independent enterprises while neglecting the analysis of such behavior among affiliated enterprises. From the perspective of intra-group affiliations, this paper reveals the phenomenon that enterprises engage in potential tax avoidance by establishing affiliated companies, which to a certain extent broadens the understanding of corporate tax avoidance approaches. Third, this paper provides governance solutions and policy suggestions for enterprises to align with tax policies through organizational form management. It finds that the commercial registration system reform aimed at encouraging enterprise entry has boosted the rapid entry of sole proprietorship enterprises, yet failed to make substantial contributions to tax revenue, employment, investment and financing, which deserves high attention from all sectors. Accordingly, this paper puts forward operational policy suggestions.
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