Fiscal Incentives and Environmental Infrastructure in China

Antung Anthony Liu () and Junjie Zhang
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Antung Anthony Liu: Resources for the Future

RFF Working Paper Series from Resources for the Future

Abstract: This paper provides evidence that China's system of tax revenue sharing is an important explanation for differences in the rate of sewage treatment plant construction among its cities. As a result of the 1994 tax reform, Chinese cities retained different shares of their value-added tax (VAT). Exploiting the persistence of this sharing system, we use the VAT share in 1995 as an instrument for the present fiscal incentives. We find that a 10 percentage point increase in the VAT sharing rate resulted in a 13.8 percent increase in the construction of sewage treatment capacity. This result suggests that fiscal incentives can play an important role in the provision of pollution-reducing infrastructure.

Keywords: sewage; water pollution; China pollution; fiscal federalism; tax sharing; tax federalism; China VAT sharing (search for similar items in EconPapers)
JEL-codes: H4 H54 H77 Q53 Q56 (search for similar items in EconPapers)
Date: 2012-09-21
New Economics Papers: this item is included in nep-acc, nep-env, nep-pbe, nep-res, nep-tra and nep-ure
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