Tax Competition Between Local Governments In China

The paper conducts theoretical as well as empirical studies on tax competition of investment attraction among local governments in East, Central and West China.In the part of theoretical analysis, the paper constructs a two-region-three-district model consisting of coastal and inland areas. Firstly, it discusses a model without tax competition, and studies how the changes of population size gap between coastal and inland areas and transportation cost, respectively, influence the equilibrium distribution of capital through comparative static analysis; Secondly, it studies the second-best capital allocation under the central government coordination. And comparing to the second-best situation, insufficient capital agglomeration emerges in coastal region under the situation of free capital flow; Thirdly, setting the model without tax competition as the benchmark model, it discusses two tax competition modes:(1) Simultaneous decision game assumes representative governments in the three regions set their tax rates at the same time;(2) Sequential decision game assumes the government in coastal region set its tax rate at first and the tax rate is observed by the governments in inland, region who will set their own tax rates to maximize the welfare of local citizen; Then through numerical simulation, it analyses the equilibrium tax rates and equilibrium capital distributions under the four situations above. The results show that, comparing to the social second-best capital allocation, the capital agglomeration in large region under the free-flowing capital model, simultaneous decision game model and sequential decision game model is more and more insufficient sequentially; At last, it also compares the similarities and differences between the two-region and three-region models through numerical analysis.In the part of empirical analysis, the paper selects data of29provinces, cities or autonomous regions from2003to2012and divides them into three panels of East, Central West China regions. It measures the variables in the model with corresponding economic indicators and verifies the results of the model with the data from real economic world.