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Fiscal Incentives and Environmental Infrastructure in China

  • Liu, Antung Anthony


    (Resources for the Future)

  • Zhang, Junjie

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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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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  1. 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.
  2. Zhuravskaya Ekatherina, 2000. "Incentives to Provide Local Public Goods: Fiscal Federalism, Russian Style," EERC Working Paper Series 99-15e, EERC Research Network, Russia and CIS.
  3. Gordon, Roger H, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 567-86, November.
  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.
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