The Political Calendar of Tax Break Policy: Firm-Level Evidence from China
50 Pages Posted: 10 Aug 2020 Last revised: 4 Sep 2020
Date Written: August 3, 2020
A rich literature has noted that electoral pressures in democracies engender political business cycles. We argue that in autocracies with strong institutions of bureaucratic management, evaluation systems based on economic performance have also generated political cycles of tax break policies. Furthermore, institutional forces have sequenced leaders' choices and produced distributional consequences across firms. Combining panel data of 1,510,153 firm-year observations with city leader data from 1995 to 2007, we find that the tax break amount dropped for most firms in the first and last year of mayors' office, i.e. the "busy" year and the "dust-settled" year. Nevertheless, large foreign firms that were especially important for mayoral performance showed a countercyclical rise in tax cuts in the beginning year. In cities where large firms dominate industrial clusters, mayors were also likely to prioritize the tax break agenda. In contrast, small- and medium-sized private firms became the bearers of tenure cycles.
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