A Study Of Tax Competition Among Local Governments In China In The View Of New Economic Geography

The local governments of China have incomplete tax rights,although there is no legal right to determine the setting of tax tables and statutory tax rates,they retain a certain degree of discretion in tax collection.Tax competition among local governments in China has become the norm,which takes place through informal means,such as exploitation of preferential tax policies allowed by the central government,tax refund,financial subsidies,and lax tax enforcement,etc.Another typical characteristic of China's economic development is the unbalanced spatial distribution of economic activities,which reflected in the interregional and intraregional level.Therefore,based on tax competition theory under the framework of the new economic geography,and combined with the realistic background of China,this paper intends to analyze the following three key issues.What are the characteristics of tax competition among local governments in China? Effect of economic agglomeration in China on tax competition: positive or negative? What is the effect of tax competition among local government in China on economic growth?This paper carries out the empirical test of tax competition among local governments in China from multiple perspectives in order to grasp the characteristics of tax competition.Firstly,spatial econometric models established by using provincial panel data from 2000 to 2015,to compare tax competition interaction coefficients of different types of taxes.The results suggest that there exists significant and positive spatial tax competition among local governments in China.Tax Competition interaction coefficient in China was first increased and then decreased from 2000 to 2015.Local governments tend to mimic their neighbors' tax policies with respect to the value-added tax,corporate income tax,business tax,urban construction and maintenance tax,real estate tax,urban and township land-use tax,and land appreciation tax.The coefficients of strategic interactions are not significant at the 10% significance level for consumption tax,individual income tax,and administrative and institutional fees.When taxes are highly related to capital,local governments seem to be involved in a race to the bottom competition by lowering tax rates to create a pro-business environment.Secondly,since the asymmetric degree of tax competition based on agglomeration level has been neglected for a long time,this paper propose a two-regime spatial panel model to compare the slopes of reaction functions for the high agglomeration regime and for the low agglomeration regime.The balanced panel dataset consists of 283 prefecture-level cities and covers the period from 2004 to 2015.In different models,prefecture-level cities classified into high agglomeration regime and low agglomeration regime by 50% quantiles of economic density,by 75% quantiles of economic density,and by whether the prefecture-level city has national economic and technological development zone,respectively.The results of these models suggest that interaction coefficient for prefecture-level cities belonging to high agglomeration regime significantly higher than the interaction coefficient for prefecture-level cities belonging to low agglomeration regime.In other words,tax competition is more intense in high agglomeration regime than in low agglomeration regime.Thirdly,local governments tend to reduce the tax burden of enterprises by offering preferential tax policies in the process of intergovernmental competition,while,as far as we know,there is no research analyze the tax competition among local governments,especially tax competition in different industries,by using large-scale longitudinal micro-level data.Using data from Chinese industrial enterprises database,this paper establish an enterprise level spatial econometric model to fill the gap.Another important advantage of our data is that it can improve the reliability of conclusions by avoiding the fallacy of composition that may exist in the macro data.The panel dataset spans the period from 2004 to 2015 and focuses on light industry,material industry,chemical industry,and machinery industry.The results verify the existence of tax competition among local governments in the four industries.The enterprise tax burden will change in the same direction in response to an increase or decrease in the average tax burden of neighboring local governments.In the four major industries,the coefficient of the tax reaction function in chemical industry is the smallest.Because capital in light industry is more liquidity,the coefficient of the tax reaction function in light industry is the biggest.In order to provide the direct empirical evidence for the relation between economic agglomeration and strategic tax reaction among local governments in China,this paper establish the spatial econometric model by using provincial panel data from 2002 to 2015.The variable of the average of the tax rates of the neighboring regions and the interaction between economic agglomeration and the average of neighbors' tax rates are introduced in the model to capture the spatial factors.Furthermore,this paper set up a model with the tax competition interaction coefficients as the dependent variable and economic agglomeration as an independent variable.The study shows that China's local governments have not taxed agglomeration rent.Enterprise in the agglomeration area appears to be relatively sensitive to the marginal changes in corporate effective tax rate.Local governments in the agglomeration area have strong incentives to lower tax rates to capture more agglomeration effects,because of the spatial agglomeration of industrial activities based on policy rent,the level of economic agglomeration in the current period has not reached its maximum,etc.Market integration in China can promote economic agglomeration and increase the taxable agglomeration rent which agglomeration area with a bigger market can benefit from.In contrast,the local governments in non-agglomeration area have difficulty in competing with the governments in agglomeration area to attract investment because of the large regional differences in resource endowment.Consequently,they are more likely to pay attention to the local public revenue.Therefore,economic agglomeration can ease the “race to the bottom” in tax rates among local governments who belong to non-agglomeration area,and among non-agglomeration areas.The relation between economic agglomeration and tax competition discussed above only exists in the foreign economy.The tax competition in the domestic capital economy significantly lower than the tax competition in the foreign capital economy.Tax competition among local governments to attract the more scarce capital cause the spatial correlation between regional tax burdens,it can promote local economic development by increasing factor input,but on the other hand,it can affect the growth performance by change the local public revenue and the structure of government expenditure.In order to answer the question,“What is the effect of tax competition among local government in China on economic growth”,we should take full account of the joint effects of tax rate changes and structure bias of public expenditure on the growth rate from a spatial econometric perspective.Unfortunately,research on the economic growth effect of tax competition mostly based on the ordinary panel data model.There are relatively fewer studies based on the spatial panel data model to analysis the economic growth effect of tax competition.And the existing research do not introduce the joint effects of tax rate changes and structure bias of public expenditure on the growth rate into the spatial econometric model,which will cause the error of the regression results.In the framework of endogenous growth model,this paper apply the spatial Durbin model to test the robust relationship between effective tax rates,strategic tax reaction and economic growth by making use of a panel data set at the province level and covers the period from 2007 to 2015.The model can avoid the flaw of omit important variables in existing research literature,and improve the reliability of research findings and effectiveness of policy formulation.The results show that different types of taxes affect economic growth differently.Labor income tax rates and capital income tax rates significantly negatively related to economic growth,taxes imposed on labor income and capital income are growth distorting,whereas consumption taxes are non-distorting.Local governments tend to adopt tax competition behavior to attract the more scarce capital.A decrease in the capital income tax rate in one province induces neighboring provinces to lower their tax rates,and the share of productive public expenditure increased.Hence,capital income tax competition creates a pro-business environment that promotes local economic development.Compared to capital,labor is relatively abundant.Therefore,local governments do not have strong incentives to attract labor.The coefficient of strategic interaction is insignificant for consumption tax.Regional economic growth do not have a significant relationship with labor income tax rate changes in neighboring provinces.