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The effects of vertical and horizontal incentives on local tax efforts: evidence from China

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  • Weibo Xing
  • Qinghua Zhang

Abstract

Tax effort is a measure of a government’s effort to collect taxes. This study explores what impacts both vertical and horizontal incentives have on local governments’ tax efforts in China. For consistency with the literature, we first include typical economic and institutional factors in our analysis. We find that the effects of economic factors on local tax efforts are significant, but the effects of institutional factors tend to be weak. Fiscal decentralization, as a vertical incentive, has a significantly positive effect on tax efforts at the provincial level. Meanwhile, fiscal interaction, as a horizontal incentive, is also taken into account in a spatial specification to explain tax competition among local governments. The results show that local tax effort in China also depends on the horizontal incentive. Hence, to improve local tax effort, the central government should let the locals have more autonomy in collecting taxes and evaluate local tax effort by referring to tax collection in adjacent provinces simultaneously.

Suggested Citation

  • Weibo Xing & Qinghua Zhang, 2018. "The effects of vertical and horizontal incentives on local tax efforts: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 50(11), pages 1222-1237, March.
    • Handle: RePEc:taf:applec:v:50:y:2018:i:11:p:1222-1237
    DOI: 10.1080/00036846.2017.1355546
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    Cited by:

    1. Saeed Solaymani, 2020. "Assessing the economic and social impacts of fiscal policies," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 47(3), pages 671-694, March.
    2. Li, Hongbin & Meng, Lingsheng, 2022. "Skill biased tax policy change: Labor market effects of China’s VAT reform," Labour Economics, Elsevier, vol. 78(C).
    3. Mustafa Kiziltan & Ahmet Burcin Yereli, 2023. "Evaluating local fiscal capacity and fiscal effort of Turkish local governments: Evidence from spatial panel data analysis," Economic Change and Restructuring, Springer, vol. 56(1), pages 441-472, February.
    4. Liu, Xiufen & Fang, Hongsheng & Zhao, Lexin & Xu, Wenli, 2023. "Do VAT cuts help stabilize employment? Evidence from China’s VAT rate reform," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 190-207.
    5. Dongmin Kong & Mengxu Xiong & Ni Qin, 2023. "Tax incentives and firm pollution," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 784-813, June.
    6. Fei Peng & Langchuan Peng & Jie Mao & Peng Lu, 2021. "The Short-Run Effect of a Local Fiscal Squeeze on Pollution Abatement Expenditures: Evidence from China’s VAT Pilot Program," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(3), pages 453-485, March.
    7. Li, Xing & Shen, Guangjun, 2023. "Do tax incentives decelerate corporate financialization? Evidence from the VAT reform in China," Economic Modelling, Elsevier, vol. 125(C).

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