The Analyses On The Impact Of Horizon Tax Competition On Local Public Goods Support In China

Under the fiscal decentralization system, local governments have absolute administrative authority to support local public goods, but the fiscal authority and administrative authority are unbalanced. Under the pressure of the official performance appraisal system, there are some problems in local governments’public goods support. For example, distortions in the support of local public goods:much more expenditure has been spent on infrastructure, which can better highlight the achievements of local officials. Meanwhile, the local governments also start looking for new ways to expand revenue channels. Tax competition naturally becomes an important policy tool for the improvement of the local governments’revenue, having standardized forms as well as forms out of the rules of laws.Horizontal tax competition among provincial governments is a common phenomenon in China, having a great impact on the regional economy. Since tax is generally considered as the price of public goods, horizontal tax competition will inevitably affect the support of local public goods. Impact analyses of the tax competition on the public goods support will provide policy basis for the improvement of local public goods supply and optimizing the structure of support. What is more, it will promote the effective supply of local public goods, improving people’s livelihood.This paper is divided into five parts. In chapter1, there is an introduction which briefly introduces the background, reviews the former researches and makes a definition for tax competition and local public goods support. In chapter2, this paper adopts the methods of normal analyses by using and expanding Yan Wei (2008) three-sector model. It comes to a conclusion that horizontal tax competition will lead to a reduction effect and "reverse" distortion effect on the local public goods support. This is quite different from the previous studies. Based on this, there are analyses of other factors that impact on the support of local public goods. Then all the factors are integrated into the two impact pathways. Chapter3sorts out the present situation of horizontal tax competition and local public goods support, generalizing from the empirical observation of the data. In chapter4, to prove the correctness of the theoretical analysis, an empirical test of the years of1998-2011provincial panel data is made. The quantitative analysis is separately made on the whole country, the East and the West. The empirical results verify the theoretical expectation. Horizontal tax competition, in a certain extent, corrects the distortion of local public goods support. And simultaneously, the East and the West have different policy effects. Chapter5puts forward policy suggestions on optimizing the public goods support, according to the conclusions.The main innovation of this paper is to expand the three-sector model of Yan Wei (2008) in the theoretical analyses part. And the results of Empirical test of panel data in China verify the "reverse" distortion effect, which is quite different from the previous studies.