Political Connection And Firm’s Actual VAT Rebate Rate

The central government adjusted export VAT rebate rate (de jure rates) for seven times continually to stimulate the development of exports in China as with the trade collapse influenced by financial crisis. The total expenditure of VAT rebates are planned by central government in advance and central government grants local government to implement the specific allocation of the quotas. Therefore, not all firms can obtain the full rebate stipulated by law and the actual VAT rebate rates (de facto rates) often differ substantially from the de jure rates. Under China’s current political and economic system, political connections play a significant role in the survival and development of firms, becoming an important alternative mechanism to overcome the negative impact of the deficiencies in the system. What role political connections play for firms in obtaining the export VAT rebate rate? Using firm-level data from China’s manufacturing sector for the period 1999-2007 and introducing four forms of political connection, this paper examines the effect of different forms of political connections on the actual export rebate rates at the firm level. Moreover, taking some external factors affecting the relationship, the paper split samples to analyze different effect of political connections on the export VAT rebate rate under different institutional environment, different stage of economic development and different local financial situation. The empirical results show that the proportion of state-owned capital’ impact on export tax rebate rate is not significant; employment, output, tax forms of political connections have a significant positive impact on the firm’s actual tax rebate rate. Under different institutional environment, stages of economic development, different forms of political connections play different roles:political connections based on local government interests play positive impact on VAT rebate rates only in institution- deficient regions; employment and tax forms of political connection have a significant positive impact export tax rebate rate during period of fast economic growth; during period of slow economic growth, employment and output form of political connection can be more likely to favor firms to obtain a higher export tax rebate rate.