Corporate Tax Competition among County-Level Governments: A - - PowerPoint PPT Presentation

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Corporate Tax Competition among County-Level Governments: A - - PowerPoint PPT Presentation

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Corporate Tax Competition among County-Level Governments: A Quasi-Natural Experiment from China Yukun Sun Zhongnan University of Economics and Law June, 2019 1 / 23 Motivation County level governments have played a vital part for

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Corporate Tax Competition among County-Level Governments: A Quasi-Natural Experiment from China

Yukun Sun

Zhongnan University of Economics and Law

June, 2019

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Motivation

◮ County level governments have played a vital part for China’s economic growth ◮ Should we expect competion ◮ Shold we expect a “race to the bottom” ◮ Channels of tax competition

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Literature

◮ Theory

◮ Wilson(1986, 1999) Theory of tax competition

◮ Empirical

◮ Agrawal (2015) Sales tax competition with multiple federations ◮ Liu and Martinez-Vazquez(2014) Provincial level tax competition in China ◮ Yu et al(2016) Political competition across Chinese cities

◮ In Chinese

◮ Long et al(2014); Yang and Yin(2014); Wang and Fang (2015); Xie and Fan (2015); Li(2015);

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Mechanisms

◮ Focus on sub provincial level tax competition

◮ Government tasks are performed by prefectures and counties ◮ Most tax collectors are employed at county or lower level

◮ Lower statutory tax rate in “special economic zones” ◮ Tax holidays with complete or partial tax expemptions ◮ Tax rebates for reinvested earnings ◮ Control of level of enforcement

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Potential Contribution

◮ Investigate county tax competition in China, and try to investigate competition among multiple federations ◮ Use varies research designs

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A Simple Model

The utility function U = B (U x(xq(b), P))db + U l(gl) + U c(gc) (1) The gross of tax price q(b) =      1 + τl b ∈ 0, [min(Bl, Bc)] 1 + τc b ∈ [min(Bl, Bc), 1] 1 + τl + τs b ∈ [Bl, Bc]ifBl > Bc

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A Simple Model

The indirect utility function V = B (U x(xq(b), P))db+U l(gl(τl, τb, Bc, Bl))+U c(gc(τl, τb, Bc, Bl (2) Local government objective function F l[(τl, τb, Bc, Bl)] = B (U x(xq(b), P))db+U l(gl(τl, τb, Bc, Bl)) (3) Upper level government objective function F c[(τl, τb, Bc, Bl)] = B (U x(xq(b), P))db+U c(gc(τl, τb, Bc, B))+αU (4)

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A Simple Model

Impact of tax rates and tax bases dgj dBj = τj[xz + τl(bls + bj)Xj ∂x(b) ∂P 1 x(b)] (5) dgi dBj = τjτi[Exz ∂x(b) ∂q(b) 1 x(b) + τl(bls + bj)Xj ∂x(b) ∂P 1 x(b)] (6) dgj dτj = Xj[1 + τj(∂x(b) ∂q(b) 1 x(b) + bj + bls ∂x(b) ∂P 1 x(b))] (7) dgi dτj = τiXi[ bls bls + bi xls xi ∂x(b) ∂q(b) 1 x(b) + (bs + bls)∂x(b) ∂P 1 x(b)] (8)

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Propositions

Proposition: Given certain conditions, if governments independently choose their tax bases, tax competition lead to local governments tax the entire base

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Data and Measurement

Data: Survey of industiral firms; Prefecture and county level data Measure of tax incentives: average of effective tax rate Firm level AETR define as CIT paid devided by pre-tax profits Then calculate the AETR for all firms in a given region

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Trends in Tax Rates—Average Effective Tax Rate

(.3193758,1] (.271371,.3193758] (.2208769,.271371] [.0013423,.2208769]

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Trends in Tax Rates—Weighted Effective Tax Rate

(.325509,1] (.2647329,.325509] (.1782587,.2647329] [.001045,.1782587]

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Spatial Econometrics

◮ Model setup yit = λΣn

j=1Wijyjt + βXit + υi + ηt + ǫit

(9) ◮ Firm level data were obtained from the Annual Survey

  • f Industrial Firms

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Spatial Econometrics Results

Table: Spatial Econometrics

AETR WAETR Prefecture λ 0.1037*** 0.1306*** 0.076* (0.0211) (0.0319) (0.042) FDI share

  • 0.062***
  • 0.071***

(0.017) (0.019) County FE Y Y Y Year FE Y Y Y Observations 15,311 15,311 1023

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Domestic and Foreign

Table: Domestic and Foreign

Domestic Foreign λ 0.0823*** 0.2917*** (0.0191) (0.0632) County FE Y Y Year FE Y Y Observations 5,621 5,621 R2 0.652 0.509

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Turning Counties into Urban Districts

◮ Facilitated by the 1993 State Council approval of a Ministry of Civil Affairs report that established standards for Conversion of counties into urban districts ◮ Prefecture: Coordinate development throughout its entire territory ◮ Counties: Loss of any substantial power to control itself

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Turning Counties into Urban Districts

Table: Changes of Administrative Divisions

Year County to Division City to Division 1998 10 5 1999 10 8 2000 33 24 2001 20 6 2002 23 9 2003 9 6 2004 5 1 2005 2006 7

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Province

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Prefecture

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Differences-in-Differences

Regression equation AETRit = α + β1Di + β2Dt + β3Di × Dt + γX + ǫit (10)

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Difference-in-Differences

Table: Difference-in-Differences

ETR β3 0.0068*** (0.0021) ROA

  • 0.0186***

(0.0052) Debt

  • 0.0279***

(0.0019) lnpop 0.0826*** (0.0103) gdpper 0.0110*** (0.00374) Observations 15,138 R2 0.178

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Conclusions

◮ Local governments do compete ◮ Does it matter? What are the consequences?

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To Do List

◮ AETR for several consecutive years ◮ Add vertical competition in the mix ◮ Channels: Province-Prefecture-Country or Province-County ◮ Premutation tests ◮ Different spatial weighted matrix

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