The Minimum Wage and Corporate Tax Planning

Abstract

This paper investigates the impact of the minimum wage (MW) on corporate tax planning. By exploiting heterogeneity in the MW level across cities and over time in China, we find that increases in the MW are associated with greater tax planning by firms. Our results are robust to the consideration of a sample of contiguous firms in two adjacent cities subject to different MWs, a change specification and a difference-in-differences research design that exploits the enactment of the Labor Contract Law in 2008 as an exogenous shock to the MW. In cross-sectional analyses, we find that the positive impact of MWs on tax planning is more pronounced for firms with higher labor intensity, greater financial constraints, less product market power, and in regions with laxer enforcement. Our paper suggests that public policy decisions such as MWs impose significant, albeit likely unintended, externalities on corporate decisions.