Fiscal Pressure,Tax Burden And Total Factor Productivity

How to improve total factor productivity is essential to supply-side structural reform.The 19th National Congress of the Communist Party of China points out that we should pursue supply-side structural reform as our main task,and work hard for better quality,higher efficiency,and more robust drivers ofeconomic growth through reform and that we need to raise total factor productivity.As an important part of the current supply-side structural reform,whether the large-scale tax reduction policy can effectively improve the total factor productivity of enterprises has become an urgent question to be answered.This paper studies the impact of local government fiscal pressure brought by the abolition of agricultural tax on the total factor productivity of manufacturing industry,which provides a useful reference for answering this question.The behavior of local government is an important factor that affects the production and operation of enterprises.In order to support economic development and promote supply side structural reform,China has implemented active fiscal policies such as tax and fee reduction.The long-term sustained policy of tax and fee reduction is undoubtedly an important measure to reduce the burden of enterprises and stimulate market vitality.However,it is undeniable that the intensive introduction of tax and fee reduction policies also brings great fiscal pressure on local government.In the transitional economy,the local government is an important promoter of economic development,which can exert a great influence on the decision-making of firms in their jurisdictions.For the purpose of alleviating fiscal pressure,local governments can strengthen tax collection or non-tax revenue collection to increase fiscal revenueandsuspend subsidies to enterprisestoreduce fiscal expenditure,both of which affect enterprises under their jurisdictions.Therefore,under the influence of fiscal pressure,how will the adjustment of local government behavior affect the total factor productivity of enterprises in their jurisdictions?What are the possible channels?Does this effect have heterogeneity for enterprises?This paper studies the impacts of local government fiscal pressure brought by the abolition of agricultural tax on the total factor productivity of manufacturing industry,which provides a useful reference for answering this question.Results show that fiscal pressure would urge the county-level government to strengthen tax enforcement and non-tax revenue collection,which increases the actual tax burden and charges of enterprises and thus inhibits the growth of firms'total factor productivity.By decomposing the effects,we find that the tax enforcement plays a more important role in explaining the negative impacts of fiscal pressure on total factor productivity than non-tax revenue collection.The decreases are more pronounced in private firms,non-overcapacity firms and firms with low trans-regional mobility while the improvement of institutional environment can mitigate the negative effects.This study has fruitful policy implications.For better quality of economic growth and effectiveness of tax reduction policy,in the long run,we must fully implement the spirit of The Fourth Plenary Session of the 19th Central Committee of the Communist Party of China which points out that it is necessary to advance the modernization of China's system and capacity for governance.In the short run,while promoting the tax reduction policy,the government should also attach great importance to and take necessary measures to relieve the fiscal pressure of local governments,so as to substantially reduce the cost and enhance the total factor productivity of enterprises.