Corporate Tax Benefits from Hometown-Connected Politicians

57 Pages Posted: 11 Oct 2018 Last revised: 5 Aug 2021

See all articles by Chunfang Cao

Chunfang Cao

Sun Yat-Sen University (SYSU); Southwest University of Finance and Economics

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Changyuan Xia

Southwestern University of Finance and Economics (SWUFE) - School of Insurance

Cheng (Colin) Zeng

Hong Kong Polytechnic University

Date Written: March 10, 2020

Abstract

We examine whether politicians’ hometown favoritism exists in the assignment of corporate tax benefits. Taking advantage of a unique tax disclosure rule in China that allows us to identify firm-specific tax benefits, we find that firms are granted more favorable tax treatments if they have a hometown connection with the incumbent provincial leader. We also find evidence consistent with political leaders facing a trade-off between their social and political preferences; however, hometown favoritism remains significant even when the political leaders’ promotion incentives are strong. Further analyses show that the hometown favoritism effect is not driven by quid pro quo exchanges and the favorable tax treatment is not intended to stimulate regional economic growth, suggesting a non-economic incentive for the bestowed tax benefits. Taken together, our results are consistent with the identity economics argument that individuals’ place identity, especially hometown preference, plays an important role in the economic choices they make.

Keywords: Political Leaders; Hometown; Social Identity; Tax Benefits

JEL Classification: H26; H71; M48

Suggested Citation

Cao, Chunfang and Cheng, C.S. Agnes and Xia, Changyuan and Zeng, Cheng, Corporate Tax Benefits from Hometown-Connected Politicians (March 10, 2020). Available at SSRN: https://ssrn.com/abstract=3251384 or http://dx.doi.org/10.2139/ssrn.3251384

Chunfang Cao

Sun Yat-Sen University (SYSU) ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

Southwest University of Finance and Economics ( email )

China

C.S. Agnes Cheng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Changyuan Xia

Southwestern University of Finance and Economics (SWUFE) - School of Insurance ( email )

Liulin Campus 555, Liutai Avenue, W
Gezhi Building 227,Liulin Campus 555
成都市, SC Sichuan 611130
China

Cheng Zeng

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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