Public versus private firm responses to the tax rate reduction in China

Kenny Z. LIN, Lillian F. MILLS, Fang ZHANG

Research output: Journal PublicationsJournal Article (refereed)peer-review

44 Citations (Scopus)


This study examines how public and private firms in China respond to the 2008 statutory tax rate reduction from 33 percent to 25 percent. Using a proprietary dataset of private firms, we find that private firms report significantly more incomedecreasing current accruals than do public firms in 2007, the year prior to the tax rate reduction. These negative accruals were substantial and material, both compared with public firms and compared with 2008 accruals. By shifting their taxable income from a high- to a low-tax year, private firms save about 8.58 percent of their total tax expenses in 2007. Our results suggest that countries contemplating tax rate changes should expect material inter-temporal income shifting by private firms when they predict the short-term effects of changes in the tax rate on revenue.
Original languageEnglish
Pages (from-to)137-163
Number of pages27
JournalJournal of the American Taxation Association
Issue number1
Early online dateSept 2013
Publication statusPublished - 2014

Bibliographical note

Professor Lin acknowledges financial support from Lingnan University.


  • Discretionary accruals
  • Financial reporting incentives
  • Firm ownership
  • Tax costs

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