Research Highlights

Tax revenue is a vital source of funding that enables governments to deliver public services and fulfill governance responsibilities. However, tax avoidance reduces the effectiveness of revenue collection and presents an ongoing challenge for policymakers. Traditionally, efforts to improve compliance have focused on enforcement measures such as audits and penalties, while incentive-based approaches have received less attention.

This study examines an innovative policy introduced by Chinese tax authorities, namely a tax credit rating system that evaluates and publicly classifies firms according to their compliance. Companies with the highest ratings benefit from enhanced reputation, while lower rated firms may face practical disadvantages, including reduced access to financing such as bank loans and corporate bonds due to inter agency cooperation. The research investigates whether and highly compliant firms influence the behavior of their industry peers.

The findings aim to contribute to the understanding of modern tax administration and offer practical insights for policymakers seeking more effective and balanced approaches to improving tax compliance.