Land lease revenue windfalls and local tax policy in China
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Land lease revenue windfalls and local tax policy in China Xin Liu1 · Yongzheng Liu2 Accepted: 21 October 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This study examines how land lease revenue, a fiscal resource windfall available to local governments, has shaped local tax policy in China. We follow the literature to argue that the presence of resource revenue incentivizes governments to substitute the more distortive tax policy with the resource revenue. Studying a city-level dataset and a large manufacturing firm-level dataset from 2000 to 2013, we find evidence for this argument by showing that land lease revenue available to city governments is negatively associated with the effective tax rates faced by the firms in the cities. Furthermore, we show that the effect of land lease revenue is likely to be weakened in larger cities, cities with more agglomerated industries, and cities with lower capital mobility. Finally, we show that the effect of land lease revenue on tax rates is more salient for firms that are under the direct control of local governments and for firms that have stronger bargaining power with local governments. Keywords Land lease revenue · Resource curse · Local tax policy JEL Classifications D21 · H21 · H26 · H71
1 Introduction Historically, the tax-to-GDP ratio has been low in developing countries. This ratio is generally between 10 and 20 percent of GDP in developing countries, compared to more than 40 percent in developed countries (Besley and Persson 2014; Gordon and Li 2009). A great deal of research has been devoted to understanding the tax-toGDP ratio, resulting in several explanations, including a large informal sector (Gordon and Li 2009), limited sources of tax collection information (Kleven et al. 2011; Kopczuk and Slemrod 2006; Kumler et al. 2013; Pomeranz 2015), and the lack of * Yongzheng Liu [email protected] 1
School of Finance, Renmin University of China, Beijing 100872, China
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School of Finance, China Financial Policy Research Center, Institute of Public Finance and Taxation, Renmin University of China, Beijing 100872, China
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tax enforcement technology (Kleven et al. 2016). Another important strand of literature emphasizes the impact of the so-called “resource curse” in the form of natural resources and/or financial resources. This last argument contends that resource abundance is not always a blessing but can be a curse to local society, leading to slower economic growth or weaker state capacity (Ades and Tella 1999; Brollo et al. 2013; Caselli and Michaels 2013; Robinson et al. 2006; Ross 2015; Vicente 2010).1 Specifically, the presence of resource revenue decreases the incentive for governments to take action that would expand more costly tax bases, thus weakening tax enforcement and the accountability relationship between citizens and governments (Auty 2007; Knack 2009; Ross 1999; Thomas and Treviño 2013). Meanwhile, this argument also echoes the long-standing debate in th
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