Local government fiscal squeeze, environmental regulation and firms’ polluting behavior: Evidence from China

Fei Peng, Ling Wang, Langchuan Peng and Huaqing Wu

Economic Modelling, 2023, vol. 125, issue C

Abstract: Government fiscal capability is closely related to the environmental regulation policy, but few studies have considered the effect of local government fiscal squeeze on firms' environmental decisions. Adopting a sample of Chinese industrial firms between 2002 and 2012, we implement a difference-in-differences (DD) method to examine the influence of fiscal squeeze on firms’ polluting behavior. We find that fiscal squeeze leads to more sulfur dioxide emissions from firms. This effect is only significant on large-scale firms, private firms, firms whose taxes are collected by the local taxation bureaus (LTB), and firms in heavily polluting sectors. We further investigate the potential mechanism and find that, resulting from the fiscal squeeze, local governments seek to expand their tax base by relaxing environmental regulations. The results suggest that keeping fiscal revenue stable is conducive to improving air quality.

Keywords: Fiscal squeeze; Corporate income tax reform; Polluting behavior; Environmental regulation; Tax base expansion (search for similar items in EconPapers)
JEL-codes: H32 H71 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:125:y:2023:i:c:s0264999323001554

DOI: 10.1016/j.econmod.2023.106343

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