This paper studies how economic policy uncertainty affects corporate tax burden. We show that economic policy uncertainty is positively related to corporate tax burden, and the effect is stronger when the tax quotas are higher. Furthermore, we find that economic policy uncertainty strengthens tax collection by increasing government fiscal pressure, thereby increasing corporate tax burden. Besides, the effects of economic policy uncertainty on corporate tax burden are primarily significant in state-owned enterprises (SOEs), non-high-tech firms, firms from the eastern areas and service industry firms. The evidence illustrates that keeping the transparency and stability of economic policies helps to cut tax burden effectively.
Uncertainty about government policies and their potential effects can impose profound impacts on the macro economy, the financial market and firm behavior (Gulen & Ion, 2016; Phan, Sharma, & Tran, 2018; Zhang, Han, Pan, & Huang, 2015). Since the financial crisis in 2008, national governments around the world have enacted a variety of economic policies as attempts to minimize the impact of the global financial crisis. However, the different potential implementation processes and effects of these policies also increase the economic policy uncertainty (Baker, Bloom, & Davis, 2016). The extant literatures find that economic policy uncertainty has strong negative short-term influences on inflation and output (Jin, Zhong, & Wang, 2014; Jones & Olson, 2013), employment (Caggiano, Castelnuovo, & Figueres, 2017; Stock, Watson, Blinder, & Sims, 2012) and economic development (Jin et al., 2014; Scheffel, 2016; Stock et al., 2012). Besides, economic policy uncertainty also causes a drop in stock returns (Bekiros, Gupta, & Majumdar, 2016; Kang, Gracia, & Ratti, 2017; Li, Balcilar, Gupta, & Chang, 2016), increases the risk premium of municipal bonds (Gao & Qi, 2012), and causes bank credits to contract or even damages their overall financial function (Alessandri & Bottero, 2017). In addition, prior researches indicate that when firms face higher economic policy uncertainty, they will be more conservative in making investment decisions (Bernanke, 1983; Bloom, Bond, & van Reenen, 2007) and lower their investment level (Gulen & Ion, 2016; Kang, Lee, & Ratti, 2014; Wang, Chen, & Huang, 2014; Kim & Kung, 2017;Wang, Wei, & Song, 2017; Rao, Yue, & Jiang, 2017), increase cash holdings (Demir & Ersan, 2017; Hanlon, Maydew, & Saavedra, 2017; Wang, Li, & Xing, 2014) and reduce leverage ratios (Cao, Duan, & Uysal, 2013; Zhang et al., 2015). This study tries to examine the relationship between economic policy uncertainty and corporate tax burden. Since tax sharing reform in 1994, China's tax revenue as a proportion of GDP has exhibited a rising trend (Fang & Zhang, 2013). At present, Chinese government has implemented the policy of tax reduction.