Corporate Tax Benefits from Hometown-Connected Politicians
57 Pages Posted: 11 Oct 2018 Last revised: 5 Aug 2021
Date Written: March 10, 2020
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: Suggested Citation