A Study Of Incentive Mechanisms For Local Government Tax Efforts

Achieving the right incentives is key to ensuring that local governments take the initiative.After the tax-sharing reform,the vertical incentive mechanism with fiscal decentralization as the core lever has greatly stimulated local governments to develop the economy and draw revenue,achieving years of high GDP and tax revenue growth.However,the central government’s incentives for local governments’ tax efforts still suffer from insufficient and distorted incentives.Against the backdrop of the absence of major local taxes and the reduction of taxes and fees,the contradiction between local government finances and revenues has intensified,further increasing the need to incentivize their tax efforts.The optimization of local government tax effort incentive mechanism involves the construction of local tax system,the adjustment of the transfer payment system,and the allocation of tax power among vertical local governments,which is not only an important part of establishing a central and local financial relationship with clear authority and responsibility,financial coordination and regional balance but also an important measure to solve the financial dilemma faced by local governments,with the effect of moving the whole body by one hair.Assessing the incentive effects of tax reform,vertical inter-governmental tax allocation,and transfer payment systems on local governments’ tax efforts is a major topic of academic interest.The existing literature lacks systematic studies on the incentive mechanism of local government tax effort,and the tax effort of municipal and county governments is not sufficiently explored,and there is no unanimous conclusion on the incentive effect of transfer payments on local government tax effort.This study follows the research line of problem formulation-theoretical explorationempirical testing-policy inspiration.First,this study sorts out the theories related to the construction of local government tax effort incentive mechanisms and explores the theoretical models and intrinsic mechanisms of the tax sharing system and transfer payment system affecting local government tax effort.Second,based on measuring the degree of local government tax effort,the current status of local government tax effort incentives is presented.Then,the incentive effects of the comprehensive "replace business tax with valueadded tax " reform municipal and county-level government tax shares and county-level transfer payments on local government tax efforts are evaluated by using Differences-inDifferences,two-way fixed effects,and regression discontinuity models to assess the incentives of local governments’ tax efforts in a comprehensive and multi-level way.Finally,based on the findings in the full thesis,this thesis proposes a path to further optimize the incentive mechanism for local government tax efforts.The main findings of this thesis are as follows.First,the current status of local government tax revenues,tax effort,and incentives is explored.The current analysis of the scale,structure,and quality of local government tax revenues reveals that local government tax revenues mainly come from central-local shared taxes rather than local taxes.In addition,the quality of local government tax revenue varies widely among provinces,and some provinces suffer from uneven development of tax revenue from different industries and poor sustainability of tax revenue.In terms of the level of local government efforts,the differences between regions remain large.At the microlevel,there are significant differences in the tax burden of enterprises of different sizes and ownership nature as well as in different industries,which is not conducive to fair competition among enterprises.A study focusing on the current status of local government tax effort incentives after the replace business tax with value-added tax reform shows that,after the implementation of the replace business tax with value-added tax reform,local governments may increase their VAT tax efforts due to financial pressure,as they cannot be fully compensated for the loss of financial resources from the abolition of business tax.At the same time,the 50-50 VAT split exacerbates the horizontal distribution effect of VAT and deepens the distortion of tax effort incentives between regions.Overall,the reduction in local government tax autonomy weakens the incentive for local government tax efforts.The current multi-tax,multi-ratio flexible tax sharing has profoundly influenced local tax behavior.The current flexible tax share of multiple tax types and ratios profoundly affects local tax behavior.The increase of the tax share ratio can enhance the tax effort of local governments,but the share of tax types with strong tax base mobility also brings the problem of distortion of tax effort such as vicious tax competition among local governments.In addition,intuitive evidence at the descriptive level suggests that the current transfer system has a countervailing incentive effect on local government tax efforts.Second,based on provincial data,taking the implementation of the "replace business tax with value-added tax " reform as a natural experiment,the differences-in-differences method is used to explore the impact of the implementation of replacing business tax with value-added tax reform on the local government’s VAT taxation efforts.The findings of the empirical study suggest that local governments affected by the implementation of the "replace business tax with value-added tax" reform significantly increase their VAT tax effort.When local governments face more intense local government competition,local governments will reduce their effort out of a low-tax competition strategy,making the VAT effort-raising effect of the reform more pronounced in areas where local government competition is weaker.In addition,the reform has a greater impact on eastern regions and regions with high financial self-sufficiency relative to central and western regions and regions with low financial self-sufficiency.Empirical evidence from listed companies shows that local governments hit hard by the reform raised the effective VAT rate on industrial enterprises,but did not raise the corporate income tax rate in their jurisdictions,suggesting that local governments tend to increase their VAT efforts to cope with the impact of the abolition of business tax,probably because their share of VAT is larger than that of corporate income tax.Third,based on the city and county tax share data,a two-way FE model is applied to explore the impact of tax share on local government tax efforts.The findings of the empirical study suggest that tax-sharing has a positive incentive effect on local governments’ tax effort,and the higher the tax sharing rate faced by local governments,the higher their tax effort.By tax type,the effect of tax sharing to enhance local government tax effort is significant in VAT tax sharing,corporate income tax sharing,and business tax sharing.The moderating effect shows that local government competition weakens the contribution of tax share to local government tax effort,while the tax mandate faced by local government enhances the contribution of tax share to local government tax effort.The heterogeneity analysis shows that there are regional differences in the effect of tax sharing on local government tax effort,and the effect of both VAT sharing and income tax sharing on local municipal government tax effort is only present in the eastern and central regions,but not in the western region.Firm-level evidence based on tax survey data shows that tax-sharing significantly increases the effective corporate income tax rate,and the higher the tax sharing ratio,the higher the effective corporate income tax rate.At the same time,tax sharing can create problems of uneven tax burden for companies of different sizes,ownership,and political affiliation intensity.Fourth,based on county-level government transfer data,the impact of transfer payments received by county-level governments on local government tax effort is explored using a regression discontinuity using a quasi-natural experiment with central government’s designation of National Poor Counties in 1994.The empirical findings show that both general and specific transfers significantly reduce the level of tax effort of local governments.Micro evidence based on a database of Chinese industrial enterprises shows that both general and special transfers reduce the effective tax rate of corporate income tax.The disincentive effect of transfer payments on the effective tax burden of enterprises is more obvious in enterprises under the jurisdiction of tax authorities with more room for enforcement flexibility.Further,to improve the representativeness of the findings given the reality of the earlier years of county government transfer data,this thesis explores the impact of central to provincial government transfers on tax effort based on data from 2002-2017.The empirical study of the impact of central to provincial transfers on the tax effort of provincial governments shows that both general and specific transfers still significantly reduce the tax effort of local governments.The disincentive effect of transfer payments on tax effort is significant in areas with low fiscal self-sufficiency,low fiscal pressure,and poverty,and not significant in areas with high fiscal self-sufficiency,high fiscal pressure,and affluence.Combining the findings of this thesis,policy recommendations are made in the following four main areas.First,optimize the revenue division model mainly based on shared tax.There are still problems with the 50/50 VAT transition scheme implemented after the implementation of the comprehensive "replace business tax with value-added tax ",and there is a need to optimize the vertical VAT distribution mechanism and build a horizontal VAT coordination mechanism.The current sharing model based on the sharing of liquid tax bases such as corporate income tax and value-added tax has caused distortions in tax efforts such as competition for local tax sources,and it is necessary to reshape the vertical fiscal relationship between governments and reduce the proportion of local sharing of liquid tax bases.From the micro-level,it is necessary to clean up local tax policies and fair corporate tax burden.Second,accelerate the construction of a local taxation system.The incentive effect of the share on the local government’s tax effort suggests that the local government’s effort is higher when the percentage of its tax retention is larger.It is not difficult to see that local taxes with full tax power have a stronger incentive effect on local governments.Fundamentally reducing local governments’ reliance on central-local shared taxes and the need to compete for a liquid tax base through investment promotion is both a priority to alleviate the lack of tax effort incentives for local governments and to correct distortions in tax effort incentives.In future tax reform,the existing model of dividing taxes and sharing should be gradually replaced by the tax sharing model of dividing taxes.Therefore,it is necessary to accelerate the construction of a local taxation system from taxes such as consumption tax,real estate tax,environmental protection tax,and resource tax.Third,improve the transfer payment system.The study concludes that the current transfer payment system has a negative incentive for tax effort,and it is necessary to minimize the negative incentive effect of transfer payments by linking them to local tax effort,optimizing the structure of transfer payments,and strengthening the constraints on the use of transfer funds,supervision,and information disclosure mechanisms.Finally,it should be combined with supporting measures and policies such as optimizing the division of affairs and expenditure responsibilities among governments,improving the performance appraisal mechanism for officials,and perfecting the budget supervision mechanism to achieve systematic optimization of the incentive mechanism for local government tax efforts.