Research On Institutional Excess Capacity Under Chinese-style Tax Competition

In recent years,China’s economic development has entered a new stage.The slowdown of speed of economic growth reveals some economic problems,among which excess capacity has become one of the hot issues.Domestic scholars are concerned about the causes of China’s overcapacity,especially the institutional ones,and they attempt to offer practical policy advice.Quite a few scholars believe the competition among local governments under Chinese-style decentralization improves the long-term economic growth,but it also causes a few economic problems including institutional excess capacity.Some scholars find subsidy as one of the contributing factors of institutional overcapacity.They propose that local governments’ subsidy competition distorted the market and resulted in institutional overcapacity.This paper creatively studies institutional overcapacity from the aspect of tax competition,which means the preferential taxation policies used by local governments to in competition are likely to reduce the rate of capacity utilization.This research constructs a three-stage dynamic game model at first,which containing local governments and enterprises.By solving the model with backward induction,this model simulates the mechanism on how Chinese-style Tax Competition affects institutional overcapacity.The results of theoretical analysis are as follows.Under Chinese decentralization,the result of tax competition among local governments is related with the intensity of tax competition and market size.When market size is small,the higher the intensity of tax competition is,the higher the possibility of using tax preferential policies will be.Then,the degree of institutional overcapacity will rise.When market size is large,local governments may not apply tax preferential policies,so it will help reduce institutional overcapacityBased on the conclusions of theoretical analysis,this paper builds an empirical model afterwards.The empirical study uses China’s provincial panel data ranging from the year of 2001 to 2016,the findings are as follows.The high intensity of tax competition on enterprise income tax will significantly reduce provincial capacity utilization,while the intensity of tax competition on all tax has little influence.Market size affects provincial capacity utilization,the expansion of market can alleviate the institutional overcapacity caused by tax competition.In the middle and western areas,tax competition has more obvious negative effects on capacity utilization than in eastern areas;while in eastern areas market size has greater impact on capacity utilization than in other areas.