Corporate Tax Benefits from Hometown-Connected Politicians

Abstract

This study examines whether politicians exhibit hometown favoritism in assigning preferential corporate income tax rates. We find that firms with hometown connections to incumbent provincial leaders experience favorable tax treatment. This effect is more pronounced when provincial leaders have strong hometown preferences and weaker when these leaders have a strong motivation for promotion, suggesting that social incentives are the primary drivers of the effect of hometown favoritism by politicians on corporate tax benefits. Moreover, this effect is intensified when senior management of firms has personal connections with the provincial leader. The mechanism test reveals that the provincial governments tend to qualify connected firms for preferential tax policies under their jurisdictions. Overall, our results suggest that hometown favoritism by politicians promotes tax benefits for business entities.

Keywords: provincial leaders; hometown favoritism; social identity; tax benefits

JEL Classification: H26; H71; M48