Two Birds with One Stone: Artificial Intelligence, Innovation and Corporate Tax Avoidance

This paper examines the association between the adoption of artificial intelligence and corporate tax avoidance practices among Chinese firms. Utilizing a novel text-based metric to quantify AI adoption, our analysis reveals a positive correlation between AI integration and tax avoidance behaviors. Specifically, a one-standard-deviation increase in AI adoption is associated with a 0.43 percentage point rise in tax avoidance measures. The effect is notably pronounced among smaller firms, those operating in high-tech industries, and those situated in regions with more lenient tax enforcement. Mechanistic investigations suggest that both innovation-driven and cost-related channels contribute to the observed reduction in effective tax rates. Overall, our findings reveals that the adoption of AI not only brings innovation to firms but also results in unexpected tax avoidance effects.