Tax Centralization,Overtaking Strategy And China Trade Imbalance

Since the mid-1990s, China’s high growing trade surplus has been a very significant phenomenon in the economic development process. Whether from the perspective of horizontal comparison between countries or from the vertical angle of time since tax reform,China’s trade imbalances are showing growing trend.During our research, we find that the trade surplus-GDP ratio almostly reach8%in2007.In order to explain this striking phenomenon,we set tax reform as a background and construct a theoretical framework in Tax centralization angle to explain the the high trade surpluses in China. In the financial centralization,expenditure responsibilities decentralization governance system, local governments will choose overtaking strategy to get more revenue,which in the end brings rising trade imbalances.On the basis of this theoretical framework, the paper presents three theoretical hypothesis, hypothesis1:the tax centralization and overtaking strategy displays a inverted U-shaped relationship, hypothesis2:the overtaking strategy and trade imbalances displays a positive correlation. Hypothesis3:the tax centralization and trade imbalances displays a inverted U-shaped relationship.In order to test the three hypotheses, we use1995-2007China31provinces provincial panel data and use Acemoglu et al.(2003) channel identification methods. The empirical results confirm the hypothesis that the two inverted U-shaped structure and a positive correlation.The tax centralization led to China’s trade imbalances through the overtaking strategy. It is necessary to implement a centralized system of finance within a certain range if Local government wants to alleviate the extent of China’s trade imbalances.As long as the degree of centralization of finance exceeds a certain threshold, the local government will reduce the use of overtaking strategy, the gap of trade imbalances will get narrowing. The policy implications of this paper is that only to ensure that China’s tax centralization runs within a reasonable range can China effectively control the rising trade surplus,what’s more,it can pour a steady stream of impetus for the sustained and healthy development of China’s economy.