Reform of “County Directly Administered by Province” and tax competition among the lower-level local governments

【Author】

WANG Xiaolong;FANG Jinjin

【Institution】

School of Finance and China Financial Policy Research Center, Remin University of China;Agricultural Bank of China

【Abstract】

Theoretically, the financial reform of “County Directly Administered by Province” (CDAPR) not only increases tax share of the counties, but also raises their revenue through transfer expenditures. However, whether CDAPR can strengthen tax competition among county-level governments (TCCG) or not needs further empirical evidence. This paper investigates the relationship between CDAPR and TCCG through statistical data of finance and economy at the provincial and county level. The conclusion indicates that CDAPR significantly decreases industrial companies’ effective tax rate by 0.45 percentage points. The effect of CDAPR is insignificant in 2004; but from 2005 to 2007 it becomes very significant and persistent.

【Keywords】

county directly administered by province;promotion incentiveovince;tax competition;corporate effective tax rate

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