A Tale of Two Taxes: Does Corporate Income Tax Avoidance Undermine the Role of Environmental Taxation in Promoting Environmental Sustainability?

Speaker: Prof. WU Kaishu (University of Waterloo)

Host: Prof. WANG Wenming (Zhejiang University)

Venue: A423, School of Management, Zijingang Campus

Abstract: 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 avoicance. Our study provides important policy making implications by identifying an unintended consequence of environmental taxation and showing how different taxes interact with each other.