An Empirical Analysis On Tax Competition Of China Local Government

Western fiscal economists often define tax competition as a form of regulatory competition, exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources. Often, this means a governmental strategy of attracting foreign direct investment, foreign indirect investment, and high value human resources by minimizing the overall taxation level or special tax preferences, creating a comparative advantage. Before reforming and opening, China adopted united revenue and expenditure policy. Local governments at that time was more an executive agency that an independent administrative institution. After reforming and opening, China took several fiscal reforms and built market mechanism. Since then, local governments have owned the ability and motivation to participate in tax competition.Firstly, this article reviews literatures about tax competition from both theoretical and empirical perspectives. The theoretical literatures introduced in this article mainly focus on the definition, model and strategies of tax competition, and the empirical ones mainly focus on measuring the degree of tax competition among local governments. Secondly, this article introduces overviews of tax competition in China. Tax competition in China is the result of fiscal decentralization after Reform and Opening and the result of construction of market mechanism. The adjustment of upper government is one of the main factors affecting tax competition, performance evaluation system of local governors and soft budget constrain intensify the tax competition, while lacking of factor mobility impedes it. The tax competition among local governments triggers some unfavorable effects. In addition, this article point out the main means using in tax competition, namely, preferential taxation, fiscal rebate and subsidy, expense deduction, deregulation and other methods.At last, this paper runs spatial Durbin regressions on macroscopic tax burden, value-added tax burden, operation tax burden and enterprise income tax burden. The result shows that macroscopic tax burden, value-added tax burden, operation tax burden have a significant and positive competitive relation. The neighbor of a jurisdiction increases macroscopic tax burden by 1% on average, the jurisdiction will adds 0.174% in response. The neighbor of a jurisdiction increases operation tax burden by 1% on average, the jurisdiction will adds 0.271% in response. The neighbor of a jurisdiction increases enterprise income tax burden by 1% on average, the jurisdiction will adds 0.156% in response. The competition coefficient in regression on value-added tax burden is not significant in spatially and time period fixed effect model and small in spatial random effect and time period fixed effect model. The neighbor of a jurisdiction increases value-added tax burden by 1% on average, the jurisdiction will adds 0.009% in response. The competitive effect is almost negligible. From the perspective of the sign of competition coefficient, the result in this paper is different from literatures on provincial-level, but in accordance with literatures on municipal level and county level. From the perspective of absolute value of competition coefficient, taking operation tax and enterprise income tax as examples, they are smaller than those in literatures on provincial-level, but greater than those in literatures on county level. In summary, there exists tax mimic behaviors among local governments in China; in other words, the raise of tax rate in neighbor of one local government will lead its increase in tax rate.