Export To Elude

Abstract

How does domestic tax reform affect firms’ export? We address this question via a model in which firms choose their outputs for the domestic and foreign markets optimally under export tax rebates. The model predicts that strengthening domestic tax enforcement has a positive effect on exports when firms are financially constrained. We test the model predictions using detailed firm- and product-level data from Chinese industrial surveys and customs records. Our empirical analysis uses China’s Golden Tax Project, which is an information technology introduced in 2001-2002 that has dramatically reduced the cost of domestic value-added tax (VAT) enforcement. We find that after the adoption of the technology, firms located further away from local tax agencies face a higher increase in their effective VAT rates than those located nearby (the enforcement effect), and thus the former increase their export more than the latter (the elusion effect). We also find that the elusion effect is stronger for firms subject to higher export rebates or more severe financial constraints.