Fiscal Decentralization, Vertical Fiscal Imbalance and Horizontal Tax Competition of Local Governments: Empirical Evidence from China

Abstract

Based on the intergovernmental relationship under the China’s fiscal decentralization system, this paper examines the strategic interaction mode of horizontal tax competition among local governments and the spatial impact and threshold effect of fiscal structure on tax competition. We find that the tax competition among China's provincial local governments has geographic and economic spatial correlation and the competition mode is "strategic complementarity" in current period. The fiscal decentralization measured by revenue, expenditure and autonomy promotes the rise of their tax competition level and has a period extensibility. However, the vertical fiscal imbalance has a restraining effect, which is exacerbated by fiscal autonomy and weakened by the decentralization of revenue and expenditure. Our mechanism analyses further corroborate that Fiscal imbalance has a nonlinear impact on tax competition with the thresholds of revenue and expenditure decentralization and fiscal autonomy.