The Political Calendar of Tax Break Policy: Firm-Level Evidence from China

Abstract

A rich literature has noted political business cycles in democracies. We argue that in an autocracy with strong bureaucratic institutions, the pressure of evaluation and promotion has also generated political cycles of tax break policies. Furthermore, the timing and content of the evaluation have driven leaders to use tax breaks strategically to build economic performance, producing distributional consequences. Combining panel data of 1,510,153 firm-year observations with city leader data from 1995 to 2007, we find that the tax break rates dropped for most firms during mayors’ turnover years. In the first year of office, i.e., the “busy year,” mayors needed to prioritize large firms and especially large foreign firms. Small domestic private firms bore the cost of tenure cycles. In the last year of the mayor’s tenure, i.e., the “dust-settled” year, there was little incentive to seek promotion, and even important firms could not gain the mayor’s attention.