Policy Uncertainty, Official Social Capital, and the Effective Corporate Tax Rate—Evidence From Chinese Firms

Abstract

The political environment has a significant impact on the sustainable development of enterprises. This manuscript aims to investigate the effect of policy uncertainty and official social capital on enterprises’ effective tax rate (ETR) due to the change of officials. Based on the panel data from the Chinese Industrial Enterprise Database from 1998 to 2009, it is shown that the policy uncertainty caused by the change of local government officials significantly increases the ETR of enterprises. Meanwhile, municipal officials who have social ties with provincial officials in their province also tend to raise the ETR of industrial enterprises, and this tendency is more evident when the officials take office. Further research shows that the effects vary in many aspects for policy uncertainty and social capital on the ETR of enterprises. The findings of this manuscript provide support for a deeper understanding of the change in local government fiscal policies and give suggestions to strengthen political environmental governance for the sustainable development of enterprises.

“Original sin” suspicion and charitable donation of private enterprises in China

“…The first stage, known as the "scale hypothesis," asserts that large enterprises are more likely to attract attention, and the scale of an enterprise is a critical factor in determining political costs (Belz et al, 2019). In the second stage, researchers have focused on specific events, demonstrating that political costs can significantly increase for certain enterprises after such events (Grewal et al, 2019;Wang et al, 2022aWang et al, , 2022b. To further bolster the applicability of the political cost hypothesis in this paper, we examined the correlation between "original sin" suspicion and charitable donations by enterprises, with a focus on two scenarios: enterprise scale and local leadership replacement.…”

“…The influence of local leadership replacement. Changes in key local government officials, such as the replacement of local leadership, can lead to shifts in policies related to the "original sin" issue (Wang et al, 2022a(Wang et al, , 2022b. This policy uncertainty can increase the policy risk of business operations (Chen et al, 2018), thereby increasing the potential political costs faced by entrepreneurs suspected of "original sin."…”