How Does the Development of Digital Finance Affect Small Business Tax Compliance? Empirical Evidence from China

How will the development of digital finance affect corporate tax compliance? In the digital economic age, this is a crucial issue. Using the 2011-2015 national tax survey database (NTSD) and the Peking University digital finance index, this paper examines the causal relationship between digital finance and small business tax compliance. Our baseline results show that each standard deviation increase in the digital finance index reduces small business tax evasion by 7.5%. We exclude the interference of contemporaneous policies, utilize a specification design based on neighboring cities across provincial borders, and employ instrumental variable estimation methods to jointly alleviate concerns about endogeneity. Furthermore, mechanisms analysis shows that digital finance impacts small business tax evasion by easing corporate financing constraints and capturing tax-related "digital information". Finally, we analyze the heterogeneous effects of digital finance development. The effects on tax evasion are weaker for large firms (placebo group), small businesses supported by the government's industrial policy, and small businesses located in poor credit environment areas