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Fiscal incentives and local tax competition: Evidence from China
Author(s) -
Liu Yongzheng,
Tai Hang,
Yang Chenping
Publication year - 2020
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12959
Subject(s) - tax competition , economics , incentive , context (archaeology) , fiscal federalism , argument (complex analysis) , china , competition (biology) , tax reform , indirect tax , monetary economics , public economics , market economy , decentralization , paleontology , ecology , biochemistry , chemistry , political science , law , biology
This paper explores how fiscal incentives affect capital tax decisions by local governments in the Chinese context. We develop a model in which local governments, facing different fiscal incentives, compete for mobile capital over corporate taxes. The key prediction of the model, borne out in data from Chinese cities over the years 2004–13, is that an increase in the local corporate income tax‐sharing ratio, proxying local fiscal incentives, makes city governments’ horizontal tax reactions stronger. Our results contribute to the fiscal federalism literature by providing evidence in support of the argument that fiscal incentives faced by local governments significantly shape their policy choices. Additionally, we provide explicit evidence on local tax competition within provinces in China, which has long been regarded as one of the driving forces of China's rapid economic growth.