The Short-Run Effect of a Local Fiscal Squeeze on Pollution Abatement Expenditures: Evidence from China’s VAT Pilot Program

Fei Peng (), Langchuan Peng (), Jie Mao () and Peng Lu ()
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Fei Peng: Hefei University of Technology
Langchuan Peng: Nanjing Audit University
Jie Mao: University of International Business and Economics
Peng Lu: Chinese Academy of Social Sciences

Environmental & Resource Economics, 2021, vol. 78, issue 3, No 3, 453-485

Abstract: Abstract Introduced in 2012, China’s value-added tax (VAT) pilot program gradually replaced business tax (BT) with VAT. It has created a large fiscal squeeze for the local government since 75% of VAT revenue goes to the central government. Employing a difference-in-differences estimator with continuous treatment intensity, we find that this fiscal squeeze has a negative effect on pollution abatement expenditures. Moreover, private firms in eastern regions are less responsive to this shock than those in the rest of China due to having better regulated local governments. We also find that this effect is smaller in magnitude if the firm owner is younger, more educated or has industrial and political connections compared to her respective counterparts. This fiscal squeeze reduces pollution abatement expenditures more in regions with higher fiscal stress, looser environmental regulation, and lower pollution abatement costs. Further exploration shows that, in response to this fiscal squeeze, local governments have adopted several tools to compensate for revenue loss, including increasing tax enforcement and loosening environmental regulation.

Keywords: VAT pilot program; Pollution abatement expenditure; Tax burden; Environmental regulation (search for similar items in EconPapers)
JEL-codes: H32 H71 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (13)

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DOI: 10.1007/s10640-021-00539-z

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