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The Short-Run Effect of a Local Fiscal Squeeze on Pollution Abatement Expenditures: Evidence from China’s VAT Pilot Program

Author

Listed:
  • Fei Peng

    (Hefei University of Technology)

  • Langchuan Peng

    (Nanjing Audit University)

  • Jie Mao

    (University of International Business and Economics)

  • Peng Lu

    (Chinese Academy of Social Sciences)

Abstract

Introduced in 2012, China’s value-added tax (VAT) pilot program gradually replaced business tax (BT) with VAT. It has created a large fiscal squeeze for the local government since 75% of VAT revenue goes to the central government. Employing a difference-in-differences estimator with continuous treatment intensity, we find that this fiscal squeeze has a negative effect on pollution abatement expenditures. Moreover, private firms in eastern regions are less responsive to this shock than those in the rest of China due to having better regulated local governments. We also find that this effect is smaller in magnitude if the firm owner is younger, more educated or has industrial and political connections compared to her respective counterparts. This fiscal squeeze reduces pollution abatement expenditures more in regions with higher fiscal stress, looser environmental regulation, and lower pollution abatement costs. Further exploration shows that, in response to this fiscal squeeze, local governments have adopted several tools to compensate for revenue loss, including increasing tax enforcement and loosening environmental regulation.

Suggested Citation

  • Fei Peng & Langchuan Peng & Jie Mao & Peng Lu, 2021. "The Short-Run Effect of a Local Fiscal Squeeze on Pollution Abatement Expenditures: Evidence from China’s VAT Pilot Program," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(3), pages 453-485, March.
    • Handle: RePEc:kap:enreec:v:78:y:2021:i:3:d:10.1007_s10640-021-00539-z
    DOI: 10.1007/s10640-021-00539-z
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    Cited by:

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    2. Qi, Yu & Shao, Shuai & Tian, Zhihua & Xu, Yang & Yin, Jun, 2022. "Environmental consequences of fair competition: Evidence from China's corporate income tax merger policy," Ecological Economics, Elsevier, vol. 195(C).
    3. Yu, Jinliang & Qi, Yu, 2022. "BT-to-VAT reform and firm productivity: Evidence from a quasi-experiment in China," China Economic Review, Elsevier, vol. 71(C).
    4. Fei Peng & Shibiao Zhou & Tao Ding & Huaqing Wu, 2023. "Impact of fiscal expenditure stress on green transformation risk: evidence from China education authority reform," Economic Change and Restructuring, Springer, vol. 56(6), pages 4565-4601, December.
    5. Qiongzhi Liu & Jing Ren, 2023. "Local Fiscal Pressure and Enterprise Environmental Protection Investment under COVID-19: Evidence from China," Sustainability, MDPI, vol. 15(6), pages 1-20, March.
    6. Lin, Gaoyi & Ma, Liuding & Liao, Hui & Li, Jingying, 2024. "Nothing comes for free: Evidence from a tax reduction of China," China Economic Review, Elsevier, vol. 83(C).
    7. Peng, Fei & Zhou, Shibiao & Zhou, Peng, 2023. "Local government fiscal stress and corporate risk-taking: Evidence from a quasi-natural experiment in China," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1677-1695.
    8. Peng, Fei & Zhou, Shibiao & Peng, Langchuan & Mao, Defeng, 2023. "The effect of economic incentives on corporate environmental investment: Evidence from Chinese manufacturing listed firms," Economic Systems, Elsevier, vol. 47(4).
    9. Wu, Huaqing & Wang, Ling & Peng, Fei, 2024. "Does it pay to be green? The impact of emissions reduction on corporate tax burden," Journal of Asian Economics, Elsevier, vol. 91(C).
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    More about this item

    Keywords

    VAT pilot program; Pollution abatement expenditure; Tax burden; Environmental regulation;
    All these keywords.

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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