Tax Authority Enforcement and Corporate Social Security Contributions: Evidence from China

• We study the effects of the CSLTB policy on corporate social security contributions. • The CSLTB policy significantly decreases corporate social security contributions through the liquidity constraints channel. • The effects of the CSLTB are concentrated in firms with tighter financial constraints, lower tax compliance and those located in cities with greater fiscal pressure. Using the policy of the Consolidation of the State and Local Tax Bureaus (CSLTB) in China as a quasi-natural experiment, we investigate whether and how tax authority enforcement affects corporate social security contributions. The Difference-in-Differences (DiD) estimate shows that corporate social security contributions decline with an increase in tax authority enforcement. Further, we find that this effect is more pronounced for firms with tighter financial constraints, lower tax compliance and those located in cities with greater fiscal pressure. Mechanism tests show that tax authority enforcement leads to increasing in the effective income tax rate and financial risk but decreasing in operating profit. Overall, our findings suggest that tougher tax authority enforcement engenders a negative effect on corporate social security contributions by strengthening liquidity constraints.