Does Tax‐Favored Policy Improve the Profitability of Environmental Protection Firms? An Empirical Study from the Implicit Tax Perspective

An implicit tax is a reduction in the pretax rate of return driven by tax preferences. With increasingly stringent requirements of sustainable development, Chinese government actively promotes environmental protection with the direct corporate income tax rate preferences, which provide a unique opportunity to examine whether implicit taxes remain a significant tax cost in the environmental protection industry. This paper finds the existence of implicit taxes in environmental protection firms and the market structure impedes the realization of implicit taxes. The market power and market concentration reduce the negative effect of tax preferences on the firm's pretax rate of return. The environmental protection firms with lower competition bear lower implicit taxes. These findings are important to evaluate the effectiveness of the tax incentives on environmental protection firms and other tax‐favored industries.