“Race to Top” or “Race to Bottom”：An Empirical Test Based on the Tax Competition of Provincial Governments in China

Gao Fengqin; Xu Zhenhuan

doi:doi:10.16538/j.cnki.jsufe.2020.01.001

Summary

In order to make the central government’s tax policies more effective, we need to clear the motivation and operation mechanism of tax competition among local governments, as well as the role of the vertical competition of collection and management power between central and local governments in the strategic interaction among local governments, so as to provide reasonable suggestions for the central government to formulate tax policies feasibly. Therefore, based on the perspective of the political incentive, this paper uses the data of the Provincial Panel of China to examine the concrete manifestation of the tax imitation behavior taken by local governments under different motives, and further examines the impact of the collection and management power change between central and local governments on the horizontal competition of local governments. The enterprise income tax and individual income tax collected by the land tax bureau show a significant “race to bottom” effect, and the sales tax shows a significant “race to top” effect. There is no significant tax competition in the taxes related to real estate. The enterprise income tax collected by the National Tax Bureaus （NTB） organization of the central vertical management shows the effect of “race to top”, while the value-added tax with higher level of information management does not have tax competition. This also explains the rationality of the policy of “replacing business tax with VAT” and the merger of national taxation and local taxation, both of which put the tax collection behavior under the central power of collection and management, which can effectively suppress the impact of local “race to bottom” motivation and ensure the steady growth of tax revenue. In this paper, the policy change impact of the scope of enterprise income tax collection and management power is added to the model to measure the impact of vertical competition on horizontal competition, and the results show that the central government’s central management power will inhibit the “race to bottom” behavior of competing among local governments for liquid economic resources, but the centralization of collection and management power will increase the “race to bottom” effect of NTB tax revenue. This may be due to the involvement of local NTB officials in the “government-enterprise conspiracy”. In terms of policy recommendations, the first is to implement a system of rotating exchanges between the directors of taxation bureaus in various regions, and try to avoid the interference of local governments in tax collection and management. Second, tax administration should refer to the value-added tax and gradually increase the level of informatization of various taxes. Third, the implementation of the merger of national taxation and local taxation needs to consider solving the problem of raising some funds locally, thereby restraining local governments from putting pressure on the tax department through the issue of funds, and at the same time further strengthening the integration of the original local tax staff and improving the level of collection and management power.