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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.

Suggested Citation

  • Liu, Antung Anthony & Zhang, Junjie, 2012. "Fiscal Incentives and Environmental Infrastructure in China," Discussion Papers dp-12-36, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-12-36
    as

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    File URL: http://www.rff.org/RFF/documents/RFF-DP-12-36.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Jin, Hehui & Qian, Yingyi & Weingast, Barry R., 2005. "Regional decentralization and fiscal incentives: Federalism, Chinese style," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1719-1742, September.
    3. Roger H. Gordon, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 567-586.
    4. Shah, Anwar & Shen, Chunli, 2006. "Reform of the intergovernmental transfer system in China," Policy Research Working Paper Series 4100, The World Bank.
    5. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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