Political incentives and corporate income tax: Evidence from China

Abstract

AbstractWe investigate how local politicians in China exploit their discretion in enforcing tax laws to enhance their prospects of promotion to higher offices. We find that non‐state‐owned enterprises (non‐SOEs) tend to pay less income tax in the initial years after a new city leader assumes office, but this tax payment increases over the leader's tenure. Throughout city leaders' tenure, the income tax paid by non‐SOEs shows an upward trend. This political turnover effect is more pronounced among non‐SOEs incorporated in the administrative region of city leaders facing intensified peer competition and/or having a stronger incentive for promotion. By manipulating the intensity of tax enforcement over their tenure, city leaders create an upward trend in tax revenue to showcase their ability to generate sustainable fiscal revenue. Further analysis indicates that growing tax revenue over the tenure significantly increases the promotion prospects of city leaders. Overall, our findings suggest that local leaders strategically manipulate tax enforcement and revenue to enhance their prospects for promotion in contemporary China.