Analysis On The Impact Of Chinese Inter-governmental Tax Competition On Capital Flows

Competition exists in various fields. Tax competition among local governments in our country has existed for a long time. Since the reform and opening up, along with the market-oriented reform unceasingly thorough, especially the inter-governmental financial decentralization system’s establishment, local authorities at various levels in China, owning certain rights of independence in expenditures and enjoying a great deal of discretionary power in getting revenues, have gradually become relatively independent interests group. In order to pursue the maximization of self-interest, competition for the economic and tax resources among local governments is becoming increasingly fierce. Tax competition between local governments is getting more and more common, and their methods and means are also getting more and more diverse.Forced by achievement test pressure, more and more local governments are promulgating preferential policies to attract investment and promote the economic growth within their jurisdiction. However, the impact of tax competition on capital flows is still uncertain. Most scholars believe that tax competition is helpful to attract investment, because tax competition can reduce the burden of enterprises and raise the return rate. Yet, others think that vicious tax competition makes government revenue reduce, thus, public service level will drop, which may suppress investment. This paper focuses on the influence mechanism of tax competition to the capital flow. Besides that, the thesis will make empirical analysis of how the current tax competition among provinces in China influences capital flow.Firstly, using tax response function, this paper tests the existence of imitative tax competition. Based on cluster analysis, by contrasting of the macro tax burden among similar areas, the paper measures different tax competition levels of28provinces in China between1992and2009. Later, using panel data and FGLS model, empirically tests the degree of influence of inter-provincial tax competition on capital flows, separately from two points of view, national scope and regional scope. At last, according to the empirical results, puts forward corresponding policy suggestions. The whole thesis is divided into five parts. The first part is introduction, which briefly introduces the background and related concepts of this study and reviews domestic and international researches; The second part carries on a thorough analysis of the present tax competition between local governments in China, including institution background, means of competition, tests of existence and statistical measures of competitive degree; The third part studies the situation of current domestic capital flows and discusses the influence factors of the capital flow; After the analysis of the influence path of tax competition on the capital flow, the fourth part makes a empirical analysis test of the reality of China; The fifth part summarizes the main conclusions of the article, and puts forward relevant policy suggestions.