Spill-Over Effect of Tax Policy on the Environment - Evidence from Regression Discontinuity Design

This study investigates whether, and, if so, how, the stringent administration of taxes resulting from the Chinese corporate income tax collection reform (the 2002 CITC Reform) affects the intensity of the discharge of pollution by firms. The 2002 CITC Reform, launched on 1 January 2002, required state tax bureaus (STBs) to start collecting income tax from firms incorporated on and after 1 January 2002, while the income tax from firms incorporated before this date is still collected by local tax bureaus (LTBs). Leveraging a Regression Discontinuity Design, we reveal that newly-established firms strategically responded to the reform with high levels of wastewater and sulphur dioxide (SO2) emissions. The main finding is robust to a battery of robustness tests. The analyses also reveal that, after the 2002 CITC Reform, firms being taxed by STBs bore a greater tax burden, faced more severe financial constraints, and invested less in wastewater processing and desulfurization equipment than their counterparts managed by LTBs. Cross-sectional tests demonstrate that the discontinuity in pollution discharge among the firms whose taxes are managed by STBs is more pronounced among non-state-owned enterprises and firms located in provinces with less strict environmental regulations