Abstract
This paper adds to the literature by examining fiscal competition and deficit financing by local governments in a developing country, China. We examine tax competition using a unique revenue source in China, land-use premiums, in a panel dataset consolidated at the prefectural level from 2006 to 2016. Our results indicate that fiscal competition in land-use premiums exists and is stronger for wealthier than poorer prefectures, a result that supports the view of Cai and Treisman (Am Econ Rev 95:817–830, 2005. https://doi.org/10.1257/0002828054201314) that competition among asymmetrically endowed regions can lead to less discipline. Moreover, we find higher lagged deficits for prefectures lead to lower land-use premiums, a result that suggests that the prefecture does not fill any fiscal gap with own revenues, is consistent with soft budget constraint arguments, and suggests that competitive pressures do not eliminate this problem.
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Notes
For further discussions of the soft budget constraint see for instance Wildasin (1999) and Goodspeed (2002); see Pettersson-Lidbom (2010) for empirical evidence in Sweden. A related concept is the vertical fiscal gap (the difference between resources collected locally and local expenditures) which is filled by transfers from the central governments. This is sometimes called “partial fiscal decentralization” (Brueckner, 2009).
We thank a referee for researching and clarifying some of these aspects of the Land Administration Law.
Rural land is collectively owned.
In 1994, the central government decided to implement a tax-sharing reform to determine how tax revenue would be shared between the central government and local governments.
See more details about China’s local public finance in Zhao and Zhang (2022).
Most urban residents relied on the government or the public institutions that employed them to provide housing; therefore, the consequences of such a socialist housing system were a housing shortage, insufficient investment, unequal distribution, and poor living conditions (Wang and Murie, 1996).
A national law defined the concepts of “economically affordable houses” and “commodity houses.” The price of commodity houses sold or rented was determined by the housing market. This series of actions enhanced the growth of land transactions and the privatization of housing, which led to a dramatic rise in housing prices.
These jurisdictions at prefectural level include prefectural cities, autonomous prefectures, and prefectures. For convenience, these jurisdictions are called as “prefectural city” in this paper. The prefectural cities exclude four direct-controlled municipalities (Beijing, Tianjin, Shanghai, and Chongqing).
As Bound et al. (1995) indicate, it is important to avoid weak instruments. Our instruments are fairly strong with the first-stage results indicating R2 of 0.0590, and F-statistics of 11.3.
We also estimate the average total, direct and indirect effects of two-period lagged deficit per capita using the specification in column (4) of Table 5. The total effect (− 0.14918) and direct effect (− 0.14299) are negative and statistically significant at the 5% level. The direct effect is approximately equivalent to the total direct effect because the indirect effect (− 0.00619) is negative and insignificant, and its magnitude is close to zero. Therefore, the coefficient of the two-period lagged deficit per capita in column (4) of Table 5 can reflect the actual effect on the land-use premium per capita.
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We are thankful for comments and suggestions received from two anonymous referees and participants of the 57th MVEA Virtual Conference in 2020, the 96th WEAI Annual Conference in 2021, the 77th Annual Congress of the IIPF in 2021, the Dissertation Seminar at Graduate Center, CUNY in 2021, the 91st SEA Annual Conference in 2021, the International Conference on Empirical Economics in 2023, and the 79th Annual Congress of the IIPF in 2023.
Appendix
Appendix
See Tables
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See Fig.
Spatial Autocorrelation for land-use premiums. Note: Fig. 2 visualizes the spatial association for land-use premiums since it presents how similar a prefecture’s neighbors are to the prefecture itself. In panels A–C, we show the positive spatial autocorrelation for land-use premiums for 2007, 2010, and 2016, respectively. In panel D, we find a similar cluster in panels A–C, which is a low-low value cluster of land-use premium between 2006 and 2016
2.
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Goodspeed, T.J., Zhang, J. Local fiscal competition and deficits in China. Int Tax Public Finance (2024). https://doi.org/10.1007/s10797-024-09841-0
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DOI: https://doi.org/10.1007/s10797-024-09841-0