Chen: Political Inuence of Selective Tax Enforcement – Evidence from China

ABSTRACT:

Politicians can play a critical role in tax administration, but this role is rarely documented or investigated in quantitative approaches. In this paper I study VAT administration in China, which is the de jure responsibility of the State Administration of Taxation but is subject to the de facto influence of local politicians, particularly the prefectural secretaries of the Communist Party. Using the variation in turnover of secretaries between 2000 and 2007, I find that, over the tenure of the prefectural secretaries, the effective VAT rate changes in favour of capital-intensive industries, and to the detriment of labour-intensive industries. Additional evidence reveals that the favouritism towards capital intensity is not limited to VAT enforcement, but is also present for corporate income tax and access to credit. I conclude the paper by discussing several possible channels for this favouritism over the tenure of prefectural secretaries. The evidence seems to be most consistent with the explanation of corruption.

 

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