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

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, city-leader data from 1995 to 2007, and field interviews, we find that the tax-break rates dropped for most firms during mayors’ turnover years. In the first year of office, that is, 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 mayors' tenure, that is, the “dust-settled” year, there was little incentive to seek promotion, and even important firms could not gain the mayors' attention.