Chen, Xiaoguang
(2015)
Essays on the dispersion of effective VAT rates in China: causes and consequences.
PhD thesis, London School of Economics and Political Science.
Abstract
It is well known that tax administration can be subject to an influence of political power, and bad tax administration may lead to an efficiency loss. However, both the extent and the mechanisms of the political intervention and the efficiency loss are still not fully understood in empirical works.
Using the Chinese Annual Survey of Manufacturing Firms, digitized data on the turnover of prefectural secretaries of the Chinese Communist Party, and the County Public Finance Statistics Yearbook in China from the year 2000 to 2007, the three chapters in this Ph.D. thesis aim to contribute to our understanding of following three questions: 1. How do local government incentives affect tax enforcement and effective tax rate of VAT? 2. What is the role of local politicians in selective tax enforcement across industries? 3. To what extent does the dispersion in the effective VAT rate across firms lead to production efficiency loss via the channel of resource misallocation?
The results suggest that: 1. Weak local government incentives, rather than lack of information on tax base, lead to a low effective VAT rate in China. 2. There is an increasing favouritism in tax enforcement towards capital-intensive industries as the prefectural secretaries of the Chinese Communist Party stay longer in office. On the contrary, labour-intensive industries face tougher tax enforcement. 3. A tax-neutral reform which eliminates the dispersion in VAT rates across firms in the same 4-digit industry produces a gain in aggregate TFP in the order of 7.9% of GDP on average in the period from 2000 to 2007.
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