Topic: Political Connections, Tax Refund Fund Allocation, and Resource Allocation Efficiency: Evidence from China's VAT Reform

Speaker: Prof. Renjie Zhao, School of Economics and Management, Northwestern University

Time: December 14, 2024, 10:30

Venue: EMS 362

Abstract:

This paper investigates the impact of political connections on firms’ access to VAT refund credits and resource misallocation in the context of China’s 2018 dual reforms, including the VAT refund reform and the Tax Bureau merger reform. We explore how political connections with tax authorities influence the allocation of refunded input VAT credit carryovers (RIVCCs). Excluding the influence of the director’s competence, the reforms increase RIVCCs by 7% more for politically connected firms relative to non-connected firms. Our findings reveal that politically connected firms, particularly those with connections to Local Tax Bureaus (LTBs), benefit disproportionately from the reforms compared to non-connected firms. Additionally, the heterogeneity of effects based on firm ownership, size, and age further highlights the unequal distribution of benefits, with non-SOEs and larger, older firms gaining more through their political connections. The 2018 reforms exacerbated resource misallocation, as politically connected firms exhibited greater total factor productivity (TFPR) dispersion within industries across cities, driven by uneven distributions of financial capabilities, innovation, and market power.

Guest Bio:

Zhao Renjie, Professor and Ph.D. supervisor at the School of Economics and Management, Northwest University, primarily focuses on Public Economics and the Political Economy of Socialism with Chinese Characteristics. He has been selected for the National Youth Talent Program and the Shaanxi Province High-Level Talent Introduction Program. He has led several projects, including those funded by the National Natural Science Foundation and the Shaanxi University Youth Innovation Team. He has published over 30 papers in journals such as Economic Research Journal, Management World, Economic Quarterly, World Economy, as well as in Regional Science and Urban Economics and Leadership Quarterly. He also serves as a member of the Xi'an Decision-Making Advisory Committee, with research reports receiving comments from national leaders. His research achievements have won the First Prize for Outstanding Achievements in Philosophy and Social Sciences in Shaanxi Province (16th session), and his teaching achievements have been awarded the Special Prize and First Prize for Teaching Achievements in Shaanxi Province.