Tax Administration Digitalization and Entrepreneurship: A Perspective on Reducing Local Government Discretion in Tax Enforcement

Abstract

In developing countries, tax administration digitization not only reduces compliance costs but also aims to limit local government discretion to ensure tax fairness. Using China's Third Phase of the Tax Administration Information System Project (CTAIS-3) as an exogenous shock, we examine its impact on entrepreneurship. We find that CTAIS-3 significantly reduced opportunity-driven entrepreneurship at the city level. Further analysis indicates that the main reason may be the concentration of entrepreneurship in a few central, developed cities. The above impacts are mainly through two mechanisms: the convergence of tax enforcement intensity and the reduction of market segmentation. We also find that CTAIS-3 may further exacerbate regional inequality through the spatial reallocation of high-quality entrepreneurship. We offer new evidence on the economic effects of tax administration digitization in developing countries and emphasize the potential for growing regional disparities as digitalization advances.