The Research Of Economy Agglomeration And Behavior Of Tax Competition Of Local Governments In China

The Basic Tax Competition Model believes, a lower rate of tax can promote capital inflows, local governments reduce tax rate to attract investment, resulting in “race to the bottom”. And the New Economic Geography also pointed out that, when economy or industry become agglomerated in one district, “gathering force” will reduce the sensitive of capital to the tax rate, so that local governments may not be competing in tax reduction, through high tax, high level of public services also can attract capital inflows, “race to the top” becomes possible. In China, although local governments cannot decide the tax rate, but because of different tax effort, the actual tax burden is different between districts, so local tax competition in China is objective existence. On the other hand, because of differences in resource endowments and stages of development, regional economy has shown obvious non homogeneous, whether economic activitives or population highly concentrated in the eastern coastal areas. So, does economic agglomeration affect tax competition among the local governments in China? If the answer is yes, what is the effect of agglomeration among regional tax? Make them “race to the bottom” or “race to the top”?Combined with the complexity of tax competition problems in reality and the expected uncertainty of the theory, this paper attempts to discuss the applicable conditions of the Basic Tax Competition Model and the New Economic Geography, investigate the influence of agglomeration effect to the local tax competition in the premise to make further subdivision of the local tax competition strategies, and provide the theoretical references for regional policy making on the coordinated development.In the part of theoretical analysis, this paper used the theory frame of the new classical economics and new economic geography to examine the effectiveness of tax in attracting factor flows. In the Basic Tax Competition Model, a lower tax rate can bring capital inflows but lead to the equilibrium tax rates far below the optimal level, tax coordination becomes necessary. In the New Economic Geography Tax Competition Model, the effectiveness of taxes to attract the elements decided by the equilibrium of the economic system: decentralized equilibrium, tax competition between homogeneous regions is similar to the Basic Tax Competition Model, local governments race to lower their tax rates to attract elements inflow, with the concentration degree of trade freedom rising the regional tax competition will become more and more aggravated, resulting in lower Nash equilibrium tax rate, tax coordination can improve the level of social welfare; Agglomeration equilibrium, strong cohesive force of the economic system leads to the effectiveness of taxes to attract the flow of elements greatly weakened, not beyond the threshold of tax reduction even does not play any role in attracting elements inflow, due to agglomeration rents increased Nash equilibrium tax rates between regions, and relieve the regional tax competition, coordination and unification of tax rates is not necessary but reduce the overall level of social welfare.Secondly, the paper discussed the system background of tax competition between local governments in China, phase behavior characteristics and the effectiveness of tax competition in different stages. In the process of economic transition, market reform made the production factors flow freely between regions, decentralization reform gave local governments independent economic and financial controlling rights, thus the local governments had subjective motivation and objective means to compet for resources, and evaluation mechanism of the economic performance linked with the officials promotion effectively promote the potential motives into practical action. Since the reform and opening-up and China’s financial system adjustment determines the ability and means of the tax competition between local governments in different periods, tax competition showed different phase characteristics. On the other hand, we measured the regional distribution of economic activities from the total economy and sector economy perspective, combined with the central government’s tax policy on regional economic growth and coordination, found that as the economic and industrial agglomeration degree increase, the effect of fiscal and taxation policies to promote the flow of element has been greatly reduced.In the part of empirical research, according to the principle of the r egion near we divide 30 provinces of China into 7 major economic zones, and use economic indicators to define it as homogeneous regions and non homogeneous regions; at the same time selecte 16 industries, and take the industry agglomeration factors into the tax competition model, test the characteristics of tax competition among Chinese local governments at the present stage and the influence of agglomeration effect from the angle of enterprise location. From a national perspective, the regression coefficient of tax variables are negative, verified the conclusions of the new classical theory of tax competition on a lower tax rate brings capital inflows. It also shows that under the arrangement of the China type decentralization bound with the official promotion evaluation mechanism base mainly on economic performance, “race to the bottom”is still the common method to invite investment to promote economic growth of local governments. Taking into account the industrial agglomeration effects, cross coefficients of several models are significantly positive, illustrates the agglomeration has a certain role in mitigating the behavior of “race to the bottom”, as the conclusion of New Economic Geography theory of tax competition. From the results of sub-regional, interregional tax competition strategies and the agglomeration effect on it has obvious differences: non homogeneous areas show “race to the bottom”, so, out of a excessive tension of resource drain, the agglomerated areas does not give up the traditional mean s using tax reduction to compete for resources, but also reflects even non homogeneous area, agglomeration degree of its economy is also far from the total degree of agglomeration. But the present economic asymmetry objectively can help the industrial agglomeration effect play a positive role; homogeneous regional tax competition is relatively calm, there is a certain degree of “race the top”, however the agglomeration effect among regional will intense their tax competition in different extent.Finally, according to the theoretical and empirical analysis, the paper sugests: encouraging spatial concentration of capital, technology and population, inciting local governments use the agglomeration rent to raise the tax, alleviating the pressure of local malignant tax competition; Increasing the policy support of the backward areas, at the same time cultivating the competitive advantage of the central and Western regions to prevent the excessive dependence on transfer payment; Perfecting the structure of area transfer payment and project transfer payment, forming the micro economic atmosphere which incent human capital cultivation and original innovation; promoting fiscal decentralization according to the requirement of market economy system; Constructing an institutional framework which can effectively restrain the behavior of local government and guide the local government and officials rationally compete in tax.