Corporate Tax Benefits from Politicians’ Hometown

This study examines whether politicians exhibit hometown favoritism in assigning preferential corporate income tax rates. We find that firms enjoy more favorable tax treatment if they have a hometown connection with incumbent provincial leaders. This effect is more pronounced when provincial leaders' hometown preference is strong but is weaker when politicians have strong incentives for promotion, suggesting that politicians' social incentives are the primary driver of the effect of political leaders' hometown favoritism on corporate tax benefits. The mechanism test reveals that the provincial governments tend to recognize connected firms as qualified for preferential tax policies under their jurisdiction. Moreover, hometown favoritism helps promote social stability and economic growth in connected cities. Overall, our results suggest that politicians' hometown favoritism engenders tax benefits for business entities.