Summaries of Papers in This Issue

revious research suggest that value-added taxes' (VAT's) third-party reporting and paper trails self-enforce VAT collection (Pomeranz 2015).However, it is unclear whether this third-party information of VAT deters income tax avoidance.Our main hypothesis is that VAT generated third-party information can be useful for the tax authority to cross-check firms' self-reported amount for income tax purposes.This increased probability of detection reduces tax avoidance (Allingham and Sandmo 1972).We exploit the 2012 VAT reform in China during which the retail sales tax (business tax in China) was replaced with a VAT in a staggered manner across regions and time.The full sample consists of 6,948 firm-year observations for 2008 to 2019.We find that VAT adoption leads to less income tax avoidance (as measured by book and cash effective tax rates) for a given firm.We also find that the effect is more pronounced among firms that make the most of their sales to businesses than individuals, confirming that firms that leave more transaction trails respond more to the VAT adoption.We find that the VAT's deterrence effect is stronger for firms located in low-trusting regions, suggesting that thirdparty reporting and social trust could be substitutes in deterring tax avoidance.Consistent with our hypothesis that VAT paper trail could be substitute to tax audit, we find this deterrence effect is stronger for firms located in regions with low tax enforcement levels.An alternative explanation to the positive association between VAT adoption and ETRs could be the mechanical response of ETR to consumption taxes conditional on the demand elasticity faced by firms.For example, if VAT is not fully absorbed by customers, the net income reduces after VAT adoption, thereby increasing firm's ETR.We follow the method of Jacob, Michaely, and M€ uller (2019) to test whether potential consumption tax burden explains our main findings.We use size and profit margin to proxy for demand elasticity.Small and low profit margin firms face relatively more elastic demand.We do not find statistically significant increases in ETRs for firms facing lower demand elasticity.This suggests that the positive association between VAT adoption and ETRs is unlikely to be driven by the changes in the consumption tax burden borne by firms.Our findings provide the first batch of evidence of a spillover effect across taxes from VAT to income tax within the same firm.This implies that tax authorities should consider potential indirect effect when introducing a tax instrument.This result also has policy implication for tax audit efficiency.Given our findings, tax authorities should allocate resources to auditing the income tax returns of firms with more individual customers.While aiming to eliminate double taxation, the VAT reform in China generates a positive externality for income tax collection.Our study has some policy implication.Since the deterrence effect is stronger for firms with intermediary sales to other firms when designing an audit strategy, tax authorities should focus on those firms with final sales to consumers.Second, given that most firms are liable for several taxes and that these taxes may overlap in their enforcement, tax authorities should allocate their resources more efficiently.