Do Fiscal Rules Tame the Political Taxation Cycles under Authoritarian Regimes: Evidence from China’s New Budget Law

Abstract

Political budget cycles (PBCs) in Western democracies have been extensively examined. Yet, few studies have explored whether there exists a local political budget cycle under authoritarian regimes. Moreover, the question of whether fiscal rules effectively tame the political taxation cycles remains. Unlike previous studies, we bring the “business” back into the study of political “business” cycles. Using firm tax payments data in China, we confirm the presence of political cycles in local tax collection behaviors under the authoritarian system. However, in contrast to the fiscal manipulation behaviors during and before political elections in Western democracies, Chinese local leaders engage in opportunistic taxation behaviors in the early years after the Provincial Congress of the Communist Party (PCCP) when there are local leaders’ elections. The political taxation cycles disappeared following the implementation of China’s new budget law in 2015, demonstrating the effectiveness of fiscal rules in taming local political budget cycles in authoritarian regimes. This research extends the existing PBC theory to the context of non-Western democracies based on micro-level evidence.