Corporate Tax Benefits from Politicians’ Hometown

Abstract

This paper investigates the impact of the geographic coincidence of firms and political leaders on corporate tax benefits. Taking advantage of a unique tax disclosure rule in China, which allows us to identify firm-specific tax benefits, we find that firms enjoy more favorable tax treatments if their registered city is the incumbent provincial leader’s hometown. This result is not driven by quid-pro-quo exchanges and informational advantage of the political leader. However, the effect is attenuated when the leader has stronger promotion incentives. Moreover, we show heterogeneities in the effect of hometown connection on corporate tax benefits in terms of the cost-benefit trade-off. Overall, our study sheds light on how the social identity of politicians engenders tax benefits for business entities.

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

JEL Classification: H26; H71; M48