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Effective Tax Rates, Spatial Spillover, and Economic Growth in China: An Empirical Study Based on the Spatial Durbin Model

Author

Listed:
  • Xiao Cheng

    (Department of Public Affairs, Chongqing University)

  • Yanping Pu

    (Department of Public Affairs, Chongqing University
    Center for Public Economy & Public Policy Research, Chongqing University)

Abstract

Fiscal decentralization and political centralization in China have led to the strategic interaction of tax policies across provinces. By estimating the spatial Durbin model for panel data on 31 Chinese provinces from 2007-2013, we investigate the robust relationship between effective tax rates and economic growth in China from a spatial econometric perspective. We find that labor income tax rates are significantly negatively related to growth within a province, and insignificantly related to growth in neighboring provinces because the vote with one's feet mechanism is inapplicable in China. A decrease in capital income tax rates significantly enhances growth. Capital income tax competition characterized as race to the bottom induces neighboring provinces to also cut capital income tax rates to promote local economic growth. Consumption taxes are non-distorting.

Suggested Citation

  • Xiao Cheng & Yanping Pu, 2017. "Effective Tax Rates, Spatial Spillover, and Economic Growth in China: An Empirical Study Based on the Spatial Durbin Model," Annals of Economics and Finance, Society for AEF, vol. 18(1), pages 73-97, May.
    • Handle: RePEc:cuf:journl:y:2017:v:18:i:1:cheng
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    More about this item

    Keywords

    Effective tax rates; Economic growth; Spillover effects; Tax competition; Spatial Durbin model;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General

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