Abstract
This study examines the impact of payroll-tax enforcement on firm dynamism and its implications for aggregate productivity. We exploit China’s Social Security Collection Agency Reform, which transferred responsibility for collecting social-insurance contributions from local social-insurance agencies to tax authorities, thereby strengthening enforcement. We show that the reform increased firms’ social-insurance contributions, shifted workers toward informal employment without reducing overall nonagricultural employment, and reduced new firm entry while weakening incumbent firms’ profitability and investment. Overall, the reform reduced measured aggregate productivity in China’s registered, above-scale industrial sector by 3.3 percent, with entry into the above-scale industrial sector accounting for about 45 percent of the estimated decline.