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Decentralization, Incentives, and Tax Enforcement

Author

Listed:
  • Junxue Jia

    (Renmin University of China)

  • Siying Ding

    (Renmin University of China & Indiana University Bloomington)

  • Yongzheng Liu

    (Renmin University of China)

Abstract

China initiated a major decentralization reform in recent years to simultaneously improve tax autonomy and fiscal transfers toward county governments. We use an instrumental variables strategy and a county-level panel dataset for years 1995-2014 to examine the incentive effects of the reform. We find that the reform significantly reduced tax enforcement of the county governments, for which the result appears to be driven by the opposing incentive effects of the increased local tax autonomy and fiscal transfers. In particular, while the reform motivated county governments to improve tax enforcement by enhancing local tax autonomy, it dampened local tax enforcement because of the increased fiscal transfers. Our findings provide support to the argument in the decentralization literature that improving local tax autonomy, compared to increasing fiscal transfers, is a more effective way to finance local governments while strengthening local fiscal discipline.

Suggested Citation

  • Junxue Jia & Siying Ding & Yongzheng Liu, 2018. "Decentralization, Incentives, and Tax Enforcement," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1819, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper1819
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    File URL: https://icepp.gsu.edu/files/2018/09/paper1819.pdf
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    References listed on IDEAS

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