A Comparative Study On The Economic Efficiency Of Tax Competition Between China's Provinces

This article aims to examine the existence of tax competition between Chinese provinces and its impact on economic efficiency. Using a provincial panel data from 1978 to 2007, we develop an empirical framework. The first step is to estimate the tax reaction function and the existence of inter-provincial tax competition is confirmed mainly in the form of tax mimicking. In the second step, we identify the underlying mechanism from tax competition to economic efficiency, including indirect and direct mechanism. The results are as follows. First, in the indirect mechanism where the public service is seen as the middle between tax competition and economic efficiency, tax competition does not improve the efficiency of public services. Moreover, it even causes economic growth to decrease. On the other hand, tax competition in the direct mechanism also shows a negative performance. At the same time, we also explain the reality foundation of the inefficiency of tax competition.