The Impact Of Industrial Agglomeration On Tax Competition From The Perspective Of New Economic Geography

Regional harmonious development is a significant theoretical and realistic issue that Chinese government faced at present, since system of tax allocation reform in 1990s,the main point of interlocal competition had been to scramble capital-based economic resources, tax competition whose principal form are preferential policy of tax revenue at any cost and flush new district construction leads to competition relationship rather than cooperation between regions, thus blocks uniform market and is deleterious for regional harmonious development.Traditional theory hold that tax competition will lead to a" Race to Bottom" ineffective equilibrium, the New Economic Geography(NEG) offers a new perspective for study of the problem of tax competition in China:the agglomeration of industrial activities creates agglomeration rent for enterprises, local government can tax on this rent. After reviewing previous literatures about tax competition in domestic and overseas,this paper establishs a NEG’s tax competition model based on the reality of China,taking the new economic geography as the basic framework,introducing the Standard Tax Competition Model(STCM), and describing the China’s system background of tax competition and the present situation of the industrial concentration. This paper analyzes the relationship between Trade freedom, agglomeration rent and tax gap theoretically, then puts forward the theory hypothesis of industrial agglomeration affect tax competition. The analysis exploits a balance panel data on 31 provincial administrative regions of mainland China from 1994 to 2012, to establish the econometric model of multivariate linear regression, estimates the variable coefficient with GMM regression method, and test theory hypothesis empirically based on national and regional level.The findings Concluded that local governments can exploit agglomeration rent and raise tax rate appropriately, increase the tax burden level, the higher industrial concentration is, the higher the cluster rent is, and also higher tax rate is. The effect of industrial agglomeration on tax competition is different between inequality regions. Finally, the paper puts forward some policy suggestion, such as developing regional comparative advantage, improving the level of industrial concentration, transforming the pattern of economic development, establishing scientific governance mode; reforming the mechanism of official performance assessment.