Intergovernmental revenue relations, tax enforcement and tax shifting: evidence from China

This paper provides empirical evidence on how intergovernmental revenue relations would affect governments’ incentives on tax enforcement in a developing country. By taking advantage of the exogenous shock induced by China’s corporate tax income revenue sharing reform in 2002, I find that the local governments would increase tax enforcement on local business tax and surcharges (BTS) to offset the adverse fiscal shock. In addition, such tougher tax enforcement was heterogeneous across firms. The increased effective BTS was mostly driven by non-state-owned enterprises and domestic firms. This paper further shows that the incidence of corporate tax could be passed onto workers through lower wages and benefits. On average, the share of corporate tax burden borne by workers in China is approximately 62%, which is higher than the estimate in Germany (Fuest et al. in Am Econ Rev 108(2):393–418, 2018).