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Fiscal Incentives and Local Tax Competition: Evidence from China

Yongzheng Liu, Bingyang Lv, Hang Tai and Chenping Yang
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Yongzheng Liu: Renmin University of China
Bingyang Lv: Renmin University of China
Hang Tai: People’s Bank of China
Chenping Yang: Renmin University of China

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: This paper explores how fiscal incentives affect capital tax decisions by local governments in the Chinese context. We develop a model in which local governments, facing different fiscal incentives, compete for mobile capital over corporate taxes. The key prediction of the model, borne out in data from Chinese cities over the years 2004-13, is that an increase in the local corporate income tax-sharing ratio, proxying local fiscal incentives, makes city governments’ horizontal tax reactions stronger. Our results contribute to the fiscal federalism literature by providing evidence in support of the argument that fiscal incentives faced by local governments significantly shape their policy choices. Additionally, we provide explicit evidence on local tax competition within provinces in China, which has long been regarded as one of the driving forces of China’s rapid economic growth.

New Economics Papers: this item is included in nep-cna, nep-pbe, nep-tra and nep-ure
Date: 2018-09
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