How does flexible tax enforcement affect TFP? China’s exceptional approach

Abstract

To explore the relationship between flexible tax enforcement and enterprises’ business decisions, we use a difference-in-differences (DID) model to investigate the impact of flexible tax enforcement on enterprises’ TFP through China’s tax credit grading system. The findings of the study are as follows: Firstly, flexible tax enforcement will enhance the TFP of A-grade taxpayers. Secondly, two mechanisms exist to improve firms’ TFP through flexible tax enforcement. One is to stimulate enterprises to carry out R&D and innovation, and the other is to enhance the long-term awareness of managers. Finally, the promotion effect of flexible tax enforcement on non-state-owned enterprises is greater than on state-owned enterprises, and the effect on total factor productivity is more pronounced in areas of high fiscal pressure.