Abstract
The government has implemented various tax incentive policies to support the generation and growth of corporate profits, leading to what is known as an implicit tax. In actuality, there is no implicit tax phenomenon because this phenomenon occurs in a perfectly competitive market where there are no barriers to entry, transaction costs, or transaction friction. Since most Chinese companies are owned by the Chinese government and are not fully capitalist markets, the possibility of more implicit taxes is not expected to occur. Therefore, the purpose of this study is to investigate whether the Chinese government’s ownership of enterprises and the global financial crisis have had an effect on the realization of the implicit tax phenomena. The results of this study are as follows. First, the pre-tax return on equity (PTROE) of listed Chinese companies had a statistically significant positive relationship with the pre-tax subsidy on equity (PTSE). Second, for companies with a higher level of Chinese government-owned interest, PTROE had a statistically significant positive relationship with PTSE; so this result shows that Chinese companies receive tax benefits, but an implicit tax in the market is not realized. Third, during the global financial crisis, the PTROE of Chinese companies showed an insignificant negative relationship with PTSE. In addition, companies owned by the Chinese government showed an insignificant negative relationship between PTROE and PTSE during the global financial crisis. This study provides policy implications that government ownership equity and macroeconomic events influence the level of freedom in a market economy.
Highlights
Implicit taxes, along with explicit taxes, affect corporate profits or government tax revenues
For companies with a higher level of Chinese government-owned interest, pre-tax return on equity (PTROE) had a statistically significant positive relationship with pre-tax subsidy on equity (PTSE); so this result shows that Chinese companies receive tax benefits, but an implicit tax in the market is not realized
Companies owned by the Chinese government showed an insignificant negative relationship between PTROE and PTSE during the global financial crisis
Summary
Along with explicit taxes, affect corporate profits or government tax revenues. According to statistics from the Bureau of Statistics of China, in 2008 the total profit of state-owned enterprises decreased by 19.11%, compared to the same period in 2008, while that for foreign-invested enterprises increased by 8.69% in the same period and that of private enterprises rose by 39.13% in the same period. This means that the financial crisis has a greater negative impact on state-owned industrial enterprises than on private industrial enterprises and foreign-invested enterprises in China. The last section discusses the empirical results and their implications, in particular policy implications
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