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Tax–Debt Substitution? Local Government Debt Management and Corporate Tax Burden

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  • Yixuan Tan
  • Jianjun Li
  • Fanghui Li

Abstract

The Local Debt Management System Reform, introduced in 2014 and implemented in subsequent years, was a key initiative by the Chinese government to mitigate local government debt risks. Using its implementation as a natural experiment, this study examined its impact on corporate tax burdens. The results indicated that tighter debt constraints significantly increased corporate tax burdens, as local governments intensified tax collection to offset reduced debt‐related revenue. This effect was stronger in areas that were reliant on land financing and less economically developed. Further analysis revealed that, rather than reducing expenditure, local governments sought alternative revenue sources, including urban investment bonds, land transfer income, and public–private partnership projects. These findings illuminate local fiscal behavior under debt constraint and provide insights for the design of institutional frameworks aiming to manage local debt risks.

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  • Yixuan Tan & Jianjun Li & Fanghui Li, 2025. "Tax–Debt Substitution? Local Government Debt Management and Corporate Tax Burden," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 33(2), pages 252-282, March.
    • Handle: RePEc:bla:chinae:v:33:y:2025:i:2:p:252-282
    DOI: 10.1111/cwe.12576
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