Political Connection and ETR: Evidence from Chinese Private Firms

Political connections are a kind of resource that could bring convenience to individual action by investing in social relations with expectable reward. At present, the government environment becomes the important part of the Chinese private firm operation environment, which plays a significant role for the Chinese private firm survival, development, as well as competition between them. Many literatures have found the political connections had great impact on ETR. In this paper, we hypothesize that politically connected firm can pay tax at lower effective rates. Using the data of China's private listed firms from 2002 to 2005, we test the relation between political connection and ETR. The results show that firms with political connections pay tax at significantly lower effective rates in China. Our evidence suggests that political connections are a significant determinant of ETR.