From Government to Enterprises: How Tax Sharing Interacts with Tax Rates

5月 24, 2017

Lyu Binyang (吕冰洋) , Ma Guangrong (马光荣) and Mao Jie (毛捷)

School of Finance, Renmin University of China, Beijing, China

School of International Trade and Economics, UIBE, Beijing, China

Abstract: Tax sharing embodies central-local government ﬁscal relations and tax rates

reﬂect government-market relations. Research on the interactions between tax sharing and

tax rates helps uncover the effects of central-local ﬁscal relations on government-market

relations. According to our study, China’s flexible tax sharing and differential tax rates

facing ﬁrms are two important typical facts; theoretical analysis discovered that effective

corporate tax rates are inﬂuenced by local government preferences and tax sharing ratio;

empirical analysis found that increasing CIT and VAT sharing ratios for governments at

city and county levels led to the reduction of tax evasion and increase of effective tax rates.

The above conclusions have revealed the unique mechanism of how government-market

relations are inﬂuenced by ﬁscal system, explains the sources of differential tax rates facing

Chinese ﬁrms, and provides reference for next-step ﬁscal reform.

Keywords: flexible sharing, differential tax rates, central-local fiscal relations,

government and market

JEL Classiﬁcation: H77, H71, H26