Strategic Authoritarianism: The Political Cycles and Selectivity of China’s Tax-Break Policy

The forthcoming article “Strategic Authoritarianism: The Political Cycles and Selectivity of China’s Tax-Break Policy” by Ling Chen and Hao Zhang is summarized by the author(s) below. 

The study of political business cycles has in the past mostly focused on democracies. In these countries, politicians and parties manipulate economic policies in order to cater to their voters when they compete in elections. Hence, policies benefiting voters such as the expansion of budgetary spending or reduction of taxes often fluctuate according to their electoral cycles. Such strategic behavior is typically not expected for autocracies due to the lack of real elections and the arbitrary grants of beneficial policies to their cronies.  

We find, however, that in autocracies like China, where there are strong, systematic bureaucratic institutions, the pressure from evaluation and promotion has also generated political cycles of tax break policies. Chinese bureaucrats are governed by the cadre evaluation system that consists of performance indicators, among which economic indicators occupied the top position. Mayors who are evaluated have no more than five years to build their record before moving to the next position. They tend to push departments to build up indicators, and we show that offering tax breaks is effective for doing so. 

The tax breaks granted to industrial firms 1995-2007 fluctuated according to mayor tenures, based on our analysis of 1.5 million micro-level data points. The majority of firms experienced significantly fewer tax cuts in the first and last year of the mayor tenure, while tax cuts peaked in the middle years. The first year was the “busy year” when mayors had to set up and learn the ropes in the city, whereas the last year was the “dust settled” year when they already know whether the promotion would take place. For mayors beyond 55 years old who are nearing retirement and no longer eligible for promotion, the drops are even more significant.  

Our analysis also reveals heterogeneous cycles across different types of firms. We found that large firms and especially large foreign firms are not subject to a cyclical drop in the first year of a mayor’s tenure. In fact, they have a significant rise in tax cuts. This shows that the mayor prioritized these firms that carry more weight in their evaluation system, due to their contribution to GDP, foreign investment, and brand name multinationals. It is mostly smaller, private firms that are bearing the cost of the cycles. When it comes to the last year, however, even these large firms cannot attract mayors’ attention.  

The implications of our study go beyond China and contribute to the understanding of state-business relations in authoritarian countries. We highlight the role of institutions govering bureaucratic incentives. Where these institutions are strong (such as Vietnam and Singapore) as opposed to countries ruled by individual dictators, political considerations can influence economic policies in a systematic pattern. But instead of using tax breaks to earn business support for political campaigns, like in democracies, these bureaucrats are incentivized to grant tax breaks in a strategic and selective manner. When the embedded incentive structure for bureaucrats change, such as in the current Xi era, the political cycles also start to weaken.  

About the Author(s): Ling Chen is Assistant Professor, School of Advanced International Studies at Johns Hopkins University and Hao Zhang is PhD Candidate, Department of Political Science at Massachusetts Institute of Technology. Their research “Strategic Authoritarianism: The Political Cycles and Selectivity of China’s Tax-Break Policy” is now available in Early View and will appear in a forthcoming issue of the American Journal of Political Science. 

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The American Journal of Political Science (AJPS) is the flagship journal of the Midwest Political Science Association and is published by Wiley.

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