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Fiscal Incentives and Environmental Infrastructure in China

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  • Liu, Antung Anthony

    ()
    (Resources for the Future)

  • Zhang, Junjie

Abstract

This paper provides evidence that China's system of tax revenue sharing is an important explanation for differences in the rate of sewage treatment plant construction among its cities. As a result of the 1994 tax reform, Chinese cities retained different shares of their value-added tax (VAT). Exploiting the persistence of this sharing system, we use the VAT share in 1995 as an instrument for the present fiscal incentives. We find that a 10 percentage point increase in the VAT sharing rate resulted in a 13.8 percent increase in the construction of sewage treatment capacity. This result suggests that fiscal incentives can play an important role in the provision of pollution-reducing infrastructure.

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Bibliographic Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-12-36.

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Date of creation: 21 Sep 2012
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Handle: RePEc:rff:dpaper:dp-12-36

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Related research

Keywords: sewage; water pollution; China pollution; fiscal federalism; tax sharing; tax federalism; China VAT sharing;

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  1. Hehui Jin & Yingyi Qian & Barry Weingast, 1999. "Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style," Working Papers 99013, Stanford University, Department of Economics.
  2. Roger H. Gordon, 1982. "An Optimal Taxation Approach to Fiscal Federalism," NBER Working Papers 1004, National Bureau of Economic Research, Inc.
  3. Zhuravskaya, Ekaterina V., 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Journal of Public Economics, Elsevier, vol. 76(3), pages 337-368, June.
  4. Haakon Vennemo & Kristin Aunan & Henrik Lindhjem & Hans Martin Seip, 2009. "Environmental Pollution in China: Status and Trends," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(2), pages 209-230, Summer.
  5. Shah, Anwar & Shen, Chunli, 2006. "Reform of the intergovernmental transfer system in China," Policy Research Working Paper Series 4100, The World Bank.
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