A taxpaying credit rating system was recently implemented in China, which provides valuable information on the tax creditworthiness of companies. We investigate whether the level of taxpayer credit ratings is unduly influenced by the tax revenue pressure facing tax authorities.
We use regression analyses to determine whether tax credit ratings are related to the pressure on local tax authorities to collect sufficient tax revenue.
We find that under local tax revenue pressure, firms with higher tax contributions are more likely to receive A-level taxpaying credit ratings, while the impact of tax compliance diminishes. This effect is more pronounced for state-owned and non-coastal firms. Additionally, A-level ratings help firms establish political connections, enhancing their access to subsidies, loans, and land. Finally, we find that investors are less responsive to ratings perceived as influenced by tax pressure.
Prior studies generally focus on revealing the correlation between favorable economic outcomes and high tax credit ratings. However, there remains a lack of understanding regarding how these ratings are determined and ratings given by public institutions are rare. Our study demonstrates that tax revenue pressure can unduly influence these ratings.
